There’s no denying it, Tesla Motors Inc (NASDAQ:TSLA) has been one of the hottest stocks on Wall Street in recent years. Up nearly 900% since its IPO less than five years ago, TSLA stock has outperformed the S&P 500 (INDEXSP:.INX) by nearly 800 percentage points.
But, like a new driver helming a stick shift, the stock market moves in fits and starts. TSLA is in a fit right now, its stock price down 20% in the past year.
Tesla stock currently trades at a 33% discount to its all-time high, having recently dipped below $190 per share.
The elite minds over at Morgan Stanley, however, think TSLA stock is still the stock market bargain of the century. Morgan Stanley’s Tesla analyst put a price target of $1,900 on shares of the electric car-maker.
Zero Credibility
Individual investors, as a rule of thumb, shouldn’t take sell-side analyst recommendations seriously to begin with. A 2013 study asking more than 360 analysts to rank the nine factors that played into their compensation saw “the profitability of your stock recommendation” and “the accuracy and timeliness of your earnings forecasts” come in eighth and ninth place, respectively.
But wait, it gets better.
Not even two months ago, the very same person who now thinks TSLA stock will soar to $1,900 per share and a valuation of $240 billion actually lowered his price target on TSLA, which was previously at $290 per share. This person’s name is Adam Jonas, and he raised some compelling reasons for reining in his price target 50 days ago:
“We believe Elon meant what he said about potentially no US GAAP profitability before 2020. Growth and ambition may expose Tesla to risks investors have not prepared for. We cut our target to $280 on FX and lower shipments in China.”
Since Jonas dropped this analysis on TSLA in January, the risks he correctly identifies have only intensified. The U.S. dollar, a serious headwind for multinational stocks hoping to grow abroad like TSLA, has continued its stubborn march higher. The U.S. Dollar Index is up more than 7% since then; PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) is up about the same amount.
Tesla’s problems in China have worsened, too. After CEO Elon Musk threatened to fire underperforming sales managers in China in an angry letter to employees, TSLA did just that, cutting 30% of its workforce in China earlier this month after severely disappointing sales there.
Some Perspective
In light of these recent developments, the view that TSLA deserves to be worth more than companies like Procter & Gamble Co (NYSE:PG), Alibaba Group Holding Ltd (NYSE:BABA) and Verizon Communications Inc. (NYSE:VZ) is perfectly ridiculous.
Rival automakers General Motors Company (NYSE:GM) and Toyota Motor Corp (ADR) (NYSE:TM) trade at 0.4 and 0.98 times sales, respectively. (Neither has a $240 billion valuation, by the way.) The $1,900 TSLA stock price target implies a price-to-sales ratio of 28 at the end of 2016, if sales play out as expected. On trailing revenue, the P/S ratio of TSLA at $1,900 is 75.
Kindly pack up your things and leave the conversation, Morgan Stanley — you’ve had one too many vodka martinis. Any shred of credibility you had to begin with has evaporated.
I realize that TSLA stock deserves to be more richly valued than its well-established competitors, I do. But I see no reason to put tomorrow’s valuation on today’s company. If we generously grant TSLA a forward P/E ratio of 24 (using FY 2016 projections), we arrive at a price around $100 per share.
I’m not the only one laughing off Morgan Stanley’s new price target. TSLA stock is actually down more than 1% today.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
