Tesla Motors Inc. (TSLA) took a cut to its forecasted earnings Wednesday after Morgan Stanley slashed estimates even as it kept its rating on Tesla stock at “overweight” (or “buy,” essentially.)
Tesla stock still took a hit in wake of the cut to earnings, and it was rather deep soon after the opening bell. On the plus side, Morgan Stanley’s new forecast will help lower Wall Street’s so-called consensus estimate, and that will lower the bar for TSLA going forward.
The reason behind the reduction to projected earnings is concern over the company’s new Model X automobile. Analyst Adam Jonas expects TSLA to deliver just 5,000 Model X cars in 2015, down from a prior estimate of 15,000. Ensuring “uncompromising quality of initial units” will slow deliveries, the analyst said.
As a result, Jonas now expects 2014 earnings to come in at 73 cents per share. That’s a far cry from his previous estimate of $1.13. For 2015, the analyst projects earnings of $2.45 per share, down from a previous forecast of $4.39.
Perhaps most importantly, the analyst maintained his rating at the equivalent of buy and didn’t change his target price of $320. Indeed, Jonas said he views any hiccups with the Model X that ding Tesla stock as a buying opportunity. After all, Jonas still sees TSLA as the “most important manufacturer in global autos.”
The new estimates will however weigh on analysts’ average estimate, and that will make pricey Tesla stock even more expensive on a forward earnings basis. Analysts, on average, expect TSLA to post 2014 earnings of 60 cents per share and 2015 earnings at $2.99.
Tesla Stock Remains Dangerously Expensive
As a result, the forward price-to-earning multiple on Tesla stock stands at a sky-high 83, making it nearly six times as expensive as the broader market. As we’ve noted before, Tesla stock trades on momentum, not fundamentals. It’s a story stock. But that also means that whenever the narrative doesn’t go according to plan, Tesla stock can suffer a stiff selloff.
That said, there’s little doubt that Tesla stock represents something truly revolutionary and exciting. TSLA has reanimated the market for electric vehicles at pretty much the perfect time, with sustainable energy and climate change coming to the forefront of the public’s mind.
Furthermore, the market for electric vehicles truly could be transformative. Tesla could be to the automotive industry what Apple’s (AAPL) iPod was to the music and consumer electronics industries. (Or what the iPad was to the PC.)
That doesn’t change the fact that Tesla stock represents a somewhat speculative bet. Yes, TSLA holds the promise of outsized rewards, but only if you’re willing to accept outsized risk as well. After all, the auto industry is enormous and entrenched. Furthermore, it’s unlikely to sit idly by while TSLA tries to take market share with electric vehicles.
In other words, when it comes to value investors, there’s no need to look at Tesla stock. If anything, they should speed away from this name. If you’re looking for a quicker score with a chance of really high upside, however, Tesla stock fits the bill as well as any name trading on a major exchange.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
