There he goes again: Elon Musk, the battery-powered swashbuckler who is already worth more than the GDP of Nicaragua, just had another one of his best days ever. Tesla (TSLA), his Palo Alto company, was the subject of a breathless research recommendation by Morgan Stanley, and shares popped as high as $259 on Tuesday from their previous close of $218. The electric carmaker is already worth $30 billion, or just over half of General Motors.
As if Tesla needed another prize, the day also brought word that Consumer Reports named the Tesla Model S its overall top pick for 2014. “The Tesla,” glowed its review, “is brimming with innovation. Its massive, easy-to-use 17-inch touch screen controls most functions. And with its totally keyless operation, full Internet access, and ultra-quiet, zero-emission driving experience, the Tesla is a glimpse into a future where cars and computers coexist in seamless harmony.” And reports from Japan, meanwhile, have Tesla in talks with Panasonic for a massive lithium-ion battery plant that would open in 2017. According to Nikkei, Panasonic is already signing up local materials makers.
Catch your breath, for a moment, before we get to the real panting out of Morgan Stanley, which now believes a fully disruptive Tesla could be worth 30 percent more than it now is (on top of being up 65 percent in 2014 and 620 percent in a year). Yes, hope generally tends to spring eternal from the bullish ranks of Wall Street analysts. And what better time to wax whimsical and Pollyannaish than the present, when the market is near another record and a text-messaging app-shop with a few dozen employees can get taken out for $19 billion?
Still, a call to use your new-paradigm illusion is not always a siren call to disaster. You would have been foolish to have valued Apple as a mere computer maker at the turn of the century or Disney as just a theme-parks play 20 years ago. Healthy imagination is essential to growth investing.
Which is why Morgan Stanley’s Adam Jonas argues that Musk’s plans to build a battery “gigafactory” could go beyond the hulking auto industry to also upend the largely protected and predictable utility sector, which banks $360 billion in yearly power sales. “If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again,” writes Jonas, whose new $320 target for Tesla shares entail a doubling of his previous volume assumptions for vehicle sales. “If Tesla can become the world’s low-cost producer in energy storage, we see significant optionality for Tesla to disrupt adjacent industries.”
Electric utility demand runs at $2 trillion globally. Assume Tesla rolls out a 7.2-million unit global vehicle fleet, Jonas says, and the company’s cars will store energy capacity that exceeds the entire daily electricity consumption of Mexico. Taken to the max, self-sufficient “autonomous” cars like Tesla’s could contribute $5.6 trillion in global economic savings. Thus, argues Jonas, “Tesla cannot be valued on near-term multiple metrics like traditional auto companies given that we expect it to multiply revenues by more than 10 times from 2013 to 2016; by nearly 30 times by 2020; and around 60 times by 2028.”
In Morgan Stanley’s most bullish case for the decade-old automaker, battery economies of scale create a mass consumer migration to Tesla vehicles, particularly in the high-margin premium car market. That will then offshoot profitable forays into grid storage and third-party battery supply. The upshot: Tesla shares could change hands at $500 a share, which would make Musk Motors worth more than present-day GM.
To be sure, Jonas also spells out a bear case where Tesla is relegated to premium niche-brand status, margins creep back down, and the stock falls back to $100. And not everyone finds his sunny case very convincing. L. Craig Shealy, an investment banker focused on technology and energy, calls the 53-page report “fascinating—unfortunately very reminiscent of ones I read for Worldcom, Global Crossing and Covad in early 2000.”
Investors must ask themselves if the market and Tesla’s operating results will keep allowing unprecedentedly easy access to super-low-cost capital for the next 15 years, Shealy suggests. If and when Tesla becomes some combination of utility and mature auto producer, he asks, will it still be valued by the market as a high growth tech company that should trade at 10 to 20 times cash flow?
“Does this research team reside in Colorado,” concludes Shealy, “and have they recently taken delivery of an obscenely large Girl Scout cookie order?”
