Bank of America analyst John Murphy downgraded Tesla (NASDAQ:TSLA) April 22 from a “neutral” rating to “underperform” on valuation concerns. Also, the analyst lowered his target on TSLA stock by $15 to $485, 31% less than where it’s currently trading.
Is this downgrade a signal it’s time to sell or merely another Tesla naysayer trying to ruin the party?
TSLA Stock Has Run a Long Way
Benzinga’s Wayne Duggan made an interesting point about TSLA stock while reporting the analyst’s downgrade April 22. Duggan reminded investors that “Tesla shut down its production at its factory in Fremont on March 23 due to Covid-19. Since the production shutdown, the stock is up 61.4%.”
Murphy expects the global production volume in 2020 to be 23% lower than in 2019. In the first quarter, global production fell by 24%. Here in the U.S., volumes dropped by 11%. As for Tesla, it produced 102,672 vehicles in the first quarter, 33% higher over a year earlier. In terms of deliveries, Tesla delivered 88,400 in the first quarter, 40% higher than last year.
Since Tesla reported its first-quarter production and delivery numbers, Tesla stock is up 54%.
While those are impressive numbers, the world is still dealing with Covid-19 and a global recession. It’s unlikely that Tesla can keep up the pace. Since March 24, Tesla’s Fremont production facility has been shut down. It won’t be reopened until at least the beginning of May. The employees who can’t work from home have been furloughed until then.
So, the company’s lost about a month’s production in California, although its Chinese plant is producing Model 3s at a remarkable rate.
From a valuation perspective, Tesla is trading at five-times sales and 50.5-times cash flow. By comparison, Toyota (NYSE:TM), which many would consider the most efficient auto manufacturer on the planet, has a price-to-sales ratio and price-to-cash-flow ratio of 0.62 and five, respectively. Toyota’s P/S and P/CF ratios are lower today than their five-year averages.
Not convinced. Tesla’s enterprise value of $134.7 billion is 62 times its EBITDA while Toyota’s enterprise value of $309.4 billion is seven times its EBITDA; one-eighth Tesla’s.
The various shutdowns, as judged by Murphy’s estimates for 2020, are likely to hurt all vehicle producers. And yet, Tesla has a year-to-date total return through April 21 of 64% compared to -14% for Toyota.
From a valuation perspective, it’s easy to see why Murphy has grown skeptical that Tesla can keep rising in a broken economy.
Tesla’s Just Getting Started
One only needs to look at what’s happening in China to realize that Tesla’s place in the world is rising while companies such as Ford (NYSE:F) are hanging on for dear life.
In March, its China factory delivered 10,160 electric Model 3s. The China Passenger Car Association (CPCA) suggests this accounted for 30% of the entire electric vehicle market in China for May. In February, it delivered 3,900 and 2,620 in January.
That’s amazing when you consider it only broke ground in January 2019. The company’s goal in China is to produce 150,000 vehicles in a year there. In the first three months of the year, despite Covid-19, it delivered 16,680 or 11% of its goal. And it hasn’t even begun producing the Model Y SUV.
The company’s overall goal in 2020 is to deliver more than 500,000 vehicles. Despite the coronavirus, Elon Musk still believes it can meet the goal. If China keeps up the pace and the U.S. gets back to work in a couple of weeks, my bet is on Elon.
I’m sure Ark Investment Management CEO Catherine Wood would feel the same. In February, I discussed how she felt TSLA stock could hit $7,000 by 2024. In Wood’s worst-case scenario, it would hit $1,500 by then, doubling your return over five years.
“We’ve gotten much less reaction now than we did the first time around, when we put out $4,000 with that letter [August 2018],” Wood told Institutional Investor in February. “And the reason is that the stock price has more than quadrupled. If there’s one thing that investors respect, it’s the market — and the market is saying we’re right about something.”
Wood’s take on Tesla is all about innovation. The minute it becomes like Ford and stops innovating, I’m sure she’ll cut and run. Until then, I’m sure it will remain one of Ark’s largest holdings.
The Bottom Line on Tesla
Making predictions about stocks over the past three months has burned me on many occasions. That said, I do believe that Tesla will continue to gain market share in the years ahead.
I can’t tell you what’s going to happen to TSLA stock after it reports earnings April 29. What I will say is that long term, Tesla has got to be in your portfolio if you want to generate above-average returns.
Tesla is a long-term buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.