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Tesla’s Road Map to Becoming a $4,000 Stock

Tesla’s Road Map to Becoming a $4,000 Stock

Article Highlights:

  • Tesla’s stock price dropped 40% this year before rebounding 20% in one week.
  • Some bullish Wall Street analysts have a $4,000 price target.
  • CEO Elon Musk claims there will be 1 million Tesla robotaxis on the road next year.

I still remember the first time I test-drove a Tesla.

Four years ago, I was cruising along Manhattan’s West Side Highway in a Model S, with the salesperson in the passenger seat.

For most of the ride, I wasn’t exactly driving. The Tesla was on autopilot, keeping a constant distance behind the traffic ahead and narrowly passing delivery trucks in the right lane.

It wasn’t full autonomy. Drivers still need to stop at red lights and stop signs. But the vehicle easily handled highway driving at a constant speed.

I had to learn to trust that the car would keep within the lane, though. For backseat drivers or riders with control issues, autopilot is your worst nightmare.

The salesperson dropped me off in the middle of a block in lower Manhattan. When the traffic light, which was a good 20 yards away, turned yellow, he was able to accelerate off the curb in time to make it through the light before it went red.

There were a few bystanders, and we all looked at each other like: “Did that really happen?”

This particular car was a Model S P90D, equipped with “Ludicrous Speed.”  The car goes from zero to 60 miles per hour in 2.6 seconds, as fast as a Lamborghini Huracán or a McLaren 720S (at a fraction of the price).

While Tesla’s P90D remains the most impressive vehicle on the roads, it’s been a different story for Tesla’s stock.

Let’s look at both the bull and the bear cases…

Morgan Stanley’s Bear Case

Tesla’s a battleground stock.

Its stock price dropped 40% this year, before a 20% rebound in the past week.

The bears think the company could implode into bankruptcy, while some bullish Wall Street analysts have a $4,000 price target.

Analysts at Morgan Stanley worry that demand for Tesla’s electric vehicles (EVs) has reached a plateau.

The main problem, in Morgan Stanley’s eyes, is that “Tesla may have oversaturated the retail market for [electric sedans] outside of China.”

Additionally, the analysts are concerned that Tesla’s kicking off a “hardcore cost-cutting plan,” in the words of Tesla CEO Elon Musk.

Morgan Stanley fears Tesla has grown too big relative to near-term demand. There are signs that things are awry inside the company:

  • Key executives are leaving.
  • Dealerships are discounting prices.
  • Extraordinary cost-cutting efforts.

These aren’t typical behaviors of a healthy company.

After a recent equity and convertible debt raise, Tesla could end the second quarter with $13.3 billion in debt, compared to a current market cap of $37 billion.

The share price holds the key to Tesla’s future.

A lower share price could create a downward spiral, as employee morale sinks and executives leave for greener pastures. And both customers and suppliers would worry whether or not the company will be around in the future.

Would you purchase a $75,000 Model S if you thought there was a chance the car company was going the way of the DeLorean?

For the bears, that’s the most important question.

The Bull Case for Tesla

The best thing the bulls have going for them is that the bears are all over this stock.

Tesla short interest has spiked in the past year, as the bears are betting on Armageddon.

There are more than 43.62 million shares sold short, accounting for 32.65% of the float.  A bit of good news is likely to cause a sharp move higher as shorts rush for the exits at the same time.

Here’s Tesla’s short interest (blue line) v. stock price (green line) over the past three years:

Tesla’s Short Interest

Tesla Stock Price vs. Short Interest 2016-2019

A large number of shorts typically leads to a rally in Tesla’s shares, as they’re forced to cover at higher prices. Perhaps that rally has already commenced, as Tesla’s now 20% off its recent lows.

Wright’s Law

The bull thesis for Tesla is that the price of battery pack systems is on a declining cost curve. That will eventually make them much cheaper than internal combustion engines, paving the way for a world of EVs.

This thesis assumes that the price of EVs follows a little-known function called Wright’s law. It was named for Theodore Wright (no relation to Wilbur and Orville Wright) after he discovered a consistent cost decline in airplane manufacturing for every doubling of production in the 1920s.

Wright found that the cost to produce the 4,000th airplane was 15% cheaper than the 2,000th plane, which was 15% less than the 1,000th plane.

In 2018, global EV sales totaled 1.45 million. Tesla’s market share was 17%.

Based on Wright’s law, and accounting for increased demand at lower prices, global EV sales could be 20 times higher in the next four years.

If Tesla holds its current market share and EV production takes off, it’ll sell 3 million cars in 2023.

Given gross margins of 25% and an average auto industry multiple of eight times sales, this would result in a stock valued between $500 to $1,000.

However, some analysts are even more bullish.

Musk’s Vision for Tesla

Ark Investment Research has a $4,000 price target on the stock. And it claims it can go even higher if the company’s able to launch a fully autonomous taxi network, charging passengers by the mile and taking a platform fee.

Musk claims this is going to happen. At Tesla’s annual shareholder meeting on Tuesday, he reiterated his claim that there would be 1 million robotaxis on the road as of next year.

He’s not referring to new vehicles. Musk is saying that software upgrades on existing vehicles will make them fully autonomous.

If you own a Tesla, you’d be able to rent your vehicle to the robotaxi platform and make money from your car while you aren’t driving it.

By the end of 2019, Tesla plans to deliver full autonomy, although you’ll still have to supervise the driving.

By 2020, the goal’s to eliminate the need for supervision.

And then sometime after that, pending future regulatory legislation, Teslas will be driving around without anyone on board.

Don’t Bet Against Elon Musk

Musk is known for making outlandish claims that he often retracts or fails to back up. On the other hand, outside of his work as Tesla’s CEO, he also builds rocket ships that land themselves at SpaceX.

That makes it difficult to bet against the guy. I’m still as intrigued as when I took my first test-drive.

Regards,

Ian King

Editor, Automatic Fortunes

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