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Analysts are divided over what Tesla Inc.’s next moves will be after a series of negative catalysts, including being shunned by the S&P 500, sent the electric-car maker’s high flying stock into a tailspin that has seen it shed 25 per cent of its value in a mere 11 days.
The reversal in the Tesla narrative has been sudden: Up until about a week ago, the shares, which closed Friday at US$ 372.72 in New York, were in the midst of near-500 per cent year-to-date rally that temporarily gave them a P/E ratio of more than 1,000. That rally somehow gained an extra leg after the company announced it would be performing a 5-to-1 stock split.
It took multiple successive negative shocks to take the momentum out of the trade. First, Tesla announced an equity raise of $5 billion on Sept. 1 and investors responded by selling the stock, which lost more than six per cent from its opening price of over US$500. Then the company became wrapped up in a market-wide tech sell-off that has seen the Nasdaq Composite Index enter correction territory in one week. Another dagger was its exclusion from a new list of companies added to the S&P 500 — analysts and investors had expected Tesla would be added to the key index, and its inclusion had arguably already been priced into the stock.
While waiting for the company’s next steps, JMP Securities analyst Joseph Osha suggested in a note published on Friday that Tesla should look to raise even more equity.
“We believe that TSLA can and should raise more than $5 billion — we would suggest another $15 billion — in order to follow through on potentially expensive initiatives in vehicle autonomy and battery technology, while continuing to ramp output,” Osha wrote.
Osha argued that Tesla, which has an average price target of US$182, should look to take advantage of what some would consider an inflated market capitalization in order to set itself up for the future. Tesla will require US$29 billion in capex over the next five years in order to be able to hit two of Osha’s targets: to produce 2.5 million units by the end of 2025 and become a company that can generate $100 billion in revenue.
Elon Musk’s company can do this without having to accumulate further cash, he said, but if it wants to keep pace with its competitors in battery and autonomous vehicle tech, it’ll have to do more.
“There is no reason that the company should not take advantage of its position by raising another $15-$20 billion,” Osha wrote.
Roth Capital analyst Craig Irwin strongly disagreed that Tesla should look to raise further equity. Doing a raise of that size, even if it’s in multiple instalments, may backfire and sour investors on the company.
“Companies that start raising money because they can on a repetitive basis tend to lose the loyalty of investors involved,” said Irwin. “I think they’re savvy enough to know that and I just don’t expect a reckless approach from Tesla on its access to capital.”
I may be bearish on Tesla, but I'm definitely not telling people to short Tesla
Irwin is bearish on the electric car maker and has a price target of US$150 on the stock. The reason its valuation is skewed, he said, is because investors have bought into Elon Musk’s belief that the cars’ full self-driving software will go from being valued at the current mark of US$7,000 to well-over US$100,000. “I’m not a believer,” Irwin said.
However, Irwin does see some good news ahead that will please Tesla’s long investors. He suspects Musk will, by early 2021, announce a mini car to target the European market. An entry into India could also prove to be another positive catalyst for the stock. Irwin said entering those markets would be just as important to the company’s fundamentals as its move into China was.
“Is it enough for me to justify the stratospheric valuation? No,” Irwin said. “But there’s fundamental progress that’s going to be made. I may be bearish on Tesla, but I’m definitely not telling people to short Tesla.”
Copyright Postmedia Network Inc., 2020