|Buy Tesla Stock Because It's a Tech Play Beyond Just Cars -- Barrons.com|
10:52 AM ET 11/18/20
|2:28 PM ET 11/18/20|
|Real time quote.|
By Al Root
Tesla stock caught a ratings upgrade just days after the announcement that it will join the S&P 500 index in late December. The upgrade also comes after the stock is up 530% over the past year. It's a bold call, but Morgan Stanley analyst Adam Jonas believes Tesla is morphing into much more than an auto maker.
Jonas took his Tesla (ticker: TSLA) rating to the equivalent of Buy from Hold, and his price target to $540 from $360. What's more, his best-case scenario for shares is $1,068 a share, up more than 100% from recent levels.
"Tesla is on the verge of a profound [business] model shift," wrote Jonas in a Wednesday research report. "For the first time, we are adding software [and] connected vehicle services revenue to our earnings forecast and base-case valuation."
Tesla's network services business, for Jonas, includes things such as full self-driving software -- which is sold separately -- along with infotainment packages and vehicle-performance upgrades. Eventually, as Tesla's installed base of vehicles grow, Jonas sees it contributing up to 20% of Ebitda, short for earnings before interest, taxes, depreciation, and amortization. He values the business, in his base case, at roughly $160 a share, accounting for the majority of his Wednesday target price bump.
It's quite a reversal for Jonas. He rated Tesla stock at Sell with a $120 price target back in June.
Now he writes, "To only value Tesla on car sales alone ignores the multiple businesses embedded within the company." Tesla also sells insurance, plans to start a ride-sharing business and has a solar and stationary battery power storage businesses as well. Tesla plans to manufacture EV batteries too.
It's a new paradigm for valuing auto makers. Traditional investors in General Motors (GM) or Ford Motor (F) are used to valuing the auto-finance business, but struggle to value other businesses. GM, for instance, has an autonomous-driving division called Cruise. It also is negotiating an agreement with Nikola (NKLA) to supply battery and fuel-cell parts. Still, GM is valued at less than 8 times estimated 2021 earnings.
Tesla stock trades at roughly 117 times estimated 2021 earnings. Tesla, of course, is growing earnings rapidly.
In his best-case scenario, Jonas values Tesla stock at 15 times estimated 2023 sales. That works out to a value of about $462 a share for the car business, and $318 a share for the connected-services business. Software is worth about 70% of car manufacturing, according to Jonas.
The rest of the value comes from insurance, battery supply, ride sharing, and stationary power, as well as all the other business embedded inside of the company.
Tesla stock is up 2.7% in Wednesday trading. The S&P 500 and Dow Jones Industrial Average, for comparison, are up 0.2% and 0.5%, respectively.
Tesla stock is trying to break out of a recent range predominating since early September. S&P 500 indexation along with analyst upgrade might help the stock retest recent highs of about $500.