Tesla Skyrockets But Analysts Say Drive Away – Should Investors Follow Suit?

Look at any market focused website over the last week, and you will invariably come across the following: Why Tesla (TSLA) soared X amount on… (insert your day of the week here).

Tesla’s share price appears to be in discovery mode right now, with new all-time highs consistently broken over the last week. At the time of writing, Tesla is trading at $896. A game of “what if” will tell you an investment in the EV pioneer back at the start of August would have provided a nice 283% return today.

The turnaround for the auto industry disruptor over the last six months has been remarkable and shows no sign of abating quite yet. Yesterday, the stock recorded its largest one-day percentage increase since May 2013. The stock rose by 20% on account of a perfect storm of good news. Before we get to that, though, let’s head back a little, to last Wednesday, when Tesla posted its Q4 2019 earnings results.

It will surprise no one by now to learn that the Street liked the print. Tesla easily beat analysts’ estimates for both revenue and adjusted EPS. The former came in at $7.38 billion, beating the estimate of $7.02 billion, while the latter’s $2.14 per share trounced the expected EPS of $1.72. Add to the list record delivery orders, positive updates on Model Y production and strong demand for model 3s in China. The icing on the cake, though, was free cash flow of $1 billion.

Adding to the good news, this week, Panasonic reported that 2019’s final quarter was the first time its joint battery venture with Tesla had turned a profit. Not to mention Tesla signed a supplier agreement with CATL, a major Chinese manufacturer of electric vehicle batteries. Take the news, add in price upgrades from some members of the Street, and watch Tesla’s share price soar higher.

Despite all the positive developments, several analysts think the meteoric surge is about to come to an end. Needham’s Rajvindra Gill is among them. Gill is skeptical of Tesla’s “ambitious” goal of delivering 500,000 cars in 2020. The figure implies 36% growth from 2019’s result and is “highly dependent” on continued “robust” production in Fremont and the ramping up of Model 3 production in Shanghai. The 5-star analyst is “struggling” with Tesla’s surge because despite the signs of profitability, gross margins have yet to reach an inflection point. Furthermore, while Tesla reported a profit in Q4, the company’s revenue growth actually decelerated.

The 5-star analyst reiterated an Underperform rating on Tesla, though he did not provide a price target. Although Gill has a 59% success rate and average return of 11.4% per rating, the 5-star analyst is less successful when it comes to Tesla. Gill’s success rate on the stock is 27%, with an average return per rating of -101%. (To watch Gill’s track record, click here)

A fellow skeptic is RBC’s Joseph Spak. The 1-star analyst reiterated an Underperform on Tesla, along with a new price target of $530. While this target was bumped up from $315, it still implies downside in the shape of 41%. None of Spak’s 11 ratings on Tesla were profitable, with the average return per rating coming in at -176.4%. The 1-star analyst, though, does have an overall success rate of 51%. (To watch Spak’s track record, click here)

Spak said, “While the news pendulum is swinging high right now, expectations may be aggressive, causing the stock to overshoot… Ultimately, our Underperform rating on TSLA is more valuation based as we believe the current valuation assumes perfect execution on China ramp, Model Y ramp and future European factory ramp and at a faster pace than we believe likely.”

Out on the Street, the bears are in control. Tesla’s Moderate Sell consensus rating breaks down into 5 Buys, 9 Holds and 13 Sells. With an average price target of $496.15, analysts predict downside of 45%. It will be interesting to see if this bearish thesis plays out in the coming months. (See Tesla price targets and analyst ratings on TipRanks)

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