Tesla a ‘screaming buy’ or bellwether for zombie stocks? The bulls and bears state their case
All eyes were on Tesla last week as it held its investor day where it unveiled its “master plan” — including how it plans to scale up amid increasing competition. The electric vehicle giant also addressed how it could grow its market share in China, where it’s up against a slew of Chinese EV makers. But shares plummeted 7% after the event, on criticism that the compay was thin on specifics. Tesla’s stock closed at $193.81 on Monday — 49.2% off its 52-week high, compared to an average drop of 18% among its peers, according to FactSet. The company is going all out to stoke consumer demand, as it continued to cut prices on its models after a series of aggressive discounts in recent months. The move certainly seems to have sparked demand, with Musk saying in January that Tesla was seeing orders of almost twice the rate of production . Over the year so far, Tesla shares are up around 57%, but looking ahead, analysts are divided on the company’s prospects. Here’s what the bulls and the bears are saying about the world’s biggest EV maker. The bears: ‘Bellwether’ for zombie stocks Apart from the recent price cuts, Tesla has hinted at a cheap, next-generation model that would cost $25,000. Currently, the lowest-priced Tesla available is the Model 3 sedan, which starts at around $43,000. Paul Meeks, portfolio manager at Independent Solutions Wealth Management, said a lower-cost model would drive demand, and Tesla would sell a lot of units. “[But] the problem is at what cost to cash flow and profits. If we get this company coming down to a mere mortal auto profitability level, then the stock could really come down,” he told CNBC’s “Squawk Box Asia” on Thursday. He noted that Tesla currently trades at about 10 or 11 times the market value of General Motors and remains “extraordinarily expensive,” trading about 50 times this year’s earnings. “Even though it’s down 50% from its high, it’s still, as I just stated, awfully expensive,” he said. The company’s valuation being too high is a common complaint among Tesla bears. David Trainer, CEO of investment research firm New Constructs, said that it’s “nosebleed high because the cash flow expectations baked into the stock price are unreasonably optimistic.” “While Tesla (TSLA) is not a zombie stock thanks to Elon Musk’s ability to raise lots of capital, the stock is still a bellwether for the entire cohort of zombie stocks, as it shares many of the common characteristics of a zombie stock, such as an outrageous valuation and high cash burn,” he said in notes sent to CNBC. Zombie companies earn enough to operate, but not to pay the interest on their debt. “We believe Tesla’s unrelenting share price rise over the past three years – where investors completely ignored company fundamentals – inspired the birth of many of today’s zombie stocks,” Trainer added. Bull case: ‘A screaming buy’ Compare Tesla to some of the very large tech companies in the U.S. and it is “growing earnings probably two to three times plus faster and it’s cheaper,” George Gianarikas, analyst at Canaccord Genuity Capital Markets, told CNBC’s “Squawk Box Asia” on Friday. “I think you just look at this stock in terms of price to earnings. And you look at the relative growth to large cap tech companies and it’s a screaming buy,” he said. Gianarikas also said Tesla’s planned entry point vehicle looks to be a “cost game changer.” “Tesla’s cost leadership will not only drive EV adoption and help the company maintain its industry-leading margins but help accelerate the world’s transition to sustainable energy,” he said in notes sent to CNBC. Meanwhile, Goldman Sachs’ Mark Delaney kept his buy rating on the stock , following the investor day. “The bottom line is that we believe the event should increase investor confidence in Tesla’s ability to reduce costs by ~50% with its next generation platform, given the breadth and depth of Tesla’s team and how its vertically integrated model allows it to optimize on both cost and performance criteria,” he said. — CNBC’s Alex Harring contributed to this report.
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