As Tesla Earnings Arrive, Will Bulls or Bears Look Smarter?

Read The Full Article On: Nytimes

Faith in Elon Musk’s company has driven its stock to new heights. But detractors think their skepticism will be vindicated in the end.

Tesla’s stock price has soared for months, leaving investors and analysts deeply divided over a single question: Is Tesla a bubble?

To some, the answer is clearly no. They say Tesla, which has dominated the market for luxury electric vehicles, is on the verge of greatness — an Apple, Amazon or Alphabet in the making. To others, the rally has been running on fumes driven by a zealous faith in the company’s chief executive, Elon Musk.

The recent escalation in the share price has also made Tesla stock an increasingly attractive target for short-sellers — those betting that the price will fall. The company’s fourth-quarter earnings report, scheduled for Wednesday afternoon, will shed new light on its operations, but don’t expect it to settle the debate.

“In 20 years of covering tech stocks on Wall Street, it’s the most emotional bull-bear story that I’ve seen,” said Daniel Ives, an analyst at Wedbush, who is optimistic about Tesla’s future.

“I view it no different than the Red Sox vs. Yankees,” he added. “The bulls and bears on Tesla will never be having conversations over a candlelight dinner.”

Because the company’s value depends so heavily on its promise, the divide among investors and analysts is rooted not only in different perspectives, but also, at times, different sets of facts.

To the optimists, Tesla began 2020 on strong footing after pulling off an impressive comeback last year.

A surprisingly weak first quarter in 2019 left the company desperate for cash, but Tesla turned a profit in the third quarter as it cut costs and reported record deliveries. The quarterly report in late October kick-started a stock rally that has more than doubled the share price, to $566.90 on Tuesday. That has pushed Tesla’s valuation above $100 billion, eclipsing that of Volkswagen — and more than General Motors and Ford combined.

The rally got added fuel this month from Tesla’s report that it delivered 367,500 vehicles in 2019. Volkswagen delivered 30 times as many, but bulls argue that Tesla’s figure reflected healthy demand because it fell within the range of 360,000 to 400,000 that the company had forecast early last year.

“I think at the end of the day, what’s going to make the company is demand,” said Bill Selesky, an analyst with Argus Research who rated the automaker as a “buy” earlier this month. “Any time a consumer thinks about an electric vehicle, they don’t think about an electric vehicle made by Ford or G.M. or BMW. The name that always pops into their mind immediately is Tesla, so it has instant name recognition.”

In Tesla, Mr. Selesky sees a company that has reined in operating costs and research-and-development costs and brought a Shanghai factory online faster than expected. As a result, he expects the company will continue to improve performance and benefit from economies of scale.

Tesla’s recent performance has given confidence to analysts like Mr. Selesky, whose longer-term target price for the stock is $556. Colin Rusch of Oppenheimer is among the more optimistic Tesla analysts, having raised his 12-to-18-month target stock price this month to $612.

The new factory in China positions Tesla to take advantage of strong demand there, putting a goal of delivering 500,000 vehicles this year “well within reach,” Mr. Ives of Wedbush said in a note last week. At its current trajectory, the company has the potential to deliver a million vehicles sooner than expected, potentially driving its stock price as high as $900 in the coming years, depending on how Tesla fares in China, Mr. Ives said.

Other companies may be building out their electric vehicle operations, but Tesla, which produces cars domestically in Fremont, Calif., has the “most impressive product road map” of any automaker or technology company, Mr. Ives said. And the biggest mistake that Tesla’s pessimists make is “underestimating the moat that Musk and Fremont have built.”

The bears beg to differ.

To them, Tesla’s proponents see the company through rose-colored glasses, obscuring red flags like questionable consumer demand abroad, Tesla’s debt and the fact that it has not yet had a fully profitable year.

“You look at the stock price and every positive story you hear you think is right,” said Gordon Johnson, the founder of GLJ Research.

Take last year’s output — the 367,500 deliveries that heartened some investors and analysts. To bears like Mr. Johnson, there’s nothing impressive about that figure. “They’re at the low end of their guidance — that’s not incredible,” he said.

And the deliveries fell far short of the higher estimate of 420,000 to 600,000 vehicles that Mr. Musk himself provided in a call with reporters last year.

Some enthusiasm may be warranted in light of the 2019 deliveries, improved earnings and launch in China, analysts with J.P. Morgan said in a Friday note, but they also issued a warning.

“We continue to urge caution with regard to Tesla shares, which appear highly overvalued based on our understanding of the fundamentals,” the analysts wrote. Their target price for the end of this year: $240.

The stock rally was driven in part by the completion of Tesla’s factory in China, a key market. But by valuing the company so highly, the J.P. Morgan analysts argued, investors seem to believe it could rival Volkswagen in a country that VW already dominates and at a time when the German automaker “is barreling headfirst into launching a bevy of battery electric vehicles.”

Tesla’s current valuation suggests that investors believe that it can sell as many cars as Volkswagen or that it can turn a larger profit on fewer vehicles sold, assumptions that the analysts described as “highly speculative.”

Even Ralph Nader, the consumer rights advocate, has weighed in, arguing last week on Twitter that the stock market itself is a bubble inflated in large part by Tesla. But in so doing, he discovered just how contentious that debate could be.

“To my surprise,” he said in an interview, “all the Tesla fans just went berserk.”

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