A Tesla Model S is displayed during the London Motor and Tech Show at ExCel on May 16, 2019 in London, England.
John Keeble | Getty Images News | Getty Images
Tesla’s valuation has soared well past other automakers, even those which produce millions more cars each year, causing Morgan Stanley to take a look at whether Elon Musk’s company is more accurately valued as a technology stock instead.
“It appears Tesla, in the market’s view, has gone far past the point of comparison vs. traditional auto companies,” Morgan Stanley analyst Adam Jonas said in a note to investors on Thursday. “We think this is largely deserved – Tesla is a significantly faster growing auto company… and it is also more than an auto company.”
But, although Jonas thinks “Tesla can appear more reasonably valued” versus some technology companies, overall the company’s recent meteoric rise makes it even more expensive to own than Amazon or Apple.
Morgan Stanley compared Tesla and several popular technology names on two key basis: Their estimated 2025 enterprise value to EBITDA (earnings before interest, tax, depreciation and amortization) ratio and their estimated 2025 revenue growth rate.
Simply put, Morgan Stanley estimates Tesla is more expensive with lower growth than Amazon, is more expensive but has a higher growth rate than Apple or Netflix, and is cheaper than Spotify but has “materially lower growth.” The firm stuck by its underweight rating after this analysis and its $360 price target on Tesla – more than 50% below the stock’s current levels. Keep in mind the shares appear more expensive than Amazon, Apple and Netflix even when using the analyst’s cash flow and revenue estimates for five years from now, which could prove too optimistic.
“While the hyper growth story continues to manifest itself in consensus forecasts and sentiment, ultimately creating the comparison to high profile tech names, we believe there are a number of exogenous risks that investors should remain cognizant of such as competition, execution, and other geopolitical concerns,” Jonas said.
Nonetheless, Jonas said the debate will continue “as to whether Tesla is an auto company, a tech company, or something altogether different.”
Fears of a Tesla bubble
Some analysts are worried that Tesla’s rally – the stock has more than tripled in six months – is a speculative bubble that sometimes occurs in financial markets, especially near the end of bull markets.
“Tesla has gone parabolic,” said Matt Maley, chief market strategist at Miller Tabak. “This is taking Tesla well above a level that would be supported by its current fundamentals … the stock is going to get absolutely clobbered at some point before long.”
Even political activist Ralph Nader chimed in, saying in one tweet: “Watch out Tesla believers.”
“When the stock market bubble implodes, it will have been started by the surge in Tesla shares beyond speculative zeal,” Nader wrote.
Tesla’s remarkable run up has drawn many comparisons but one of the most striking was the bitcoin bubble three years ago. After running up to nearly $20,000, bitcoin crashed 65% in just a month – and finished 2018 about 80% below that peak level.
Defending Tesla’s growth
But other investors are not afraid, instead pointing to Tesla’s rapid climb as a simple matter of the stock beginning to catch up to where they think it should be. ARK Invest has a five-year price target on Tesla of $7,000 a share, a call that the firm’s founder Cathie Wood defends based on Tesla’s dominant share of the electric vehicle market.
“Tesla has not lost market share in the EV market and traditional autos have had a really hard time producing a car that’s on par with Tesla in terms of a dollar per performance or efficiency basis,” ARK Invest analyst Tasha Keeney told CNBC on Tuesday.
Wood’s prediction would mean Tesla’s market value easily exceeds $1 trillion within five years – nearly 10 times the company’s current valuation.
Similarly, major Tesla shareholder Ron Baron forecast the company’s revenue will top $1 trillion within a decade, telling CNBC on Tuesday that the stock’s recent run is “just the beginning.”
“There’s a lot of growth opportunities from that point going forward,” Baron said.
Tesla “could be one of the largest companies in the whole world,” Baron added.
– CNBC’s Michael Bloom, Yun Li and Maggie Fitzgerald contributed to this report.