Tesla Motors Inc stock has been upgraded from neutral to buy by Goldman Sachs, who also raised the six-month target for the stock to $250. Patrick Archambault – an auto analyst at Goldman Sachs – wrote, “We do not believe Tesla shares are fully capturing the company’s disruptive potential.” What’s interesting is – this buy from Goldman comes after three years of saying just wait for it.
Is Goldman being unethical?
Few hours after the research note, Tesla revealed that it will raise $2bn in an equity offering with help from Goldman Sachs. Tesla plans of selling 6.8m shares to raise $1.4bn. Elon Musk – the billionaire founder and CEO – too plans of selling shares to cover his tax liabilities, thus, bringing the planned equity offering to about $2bn. On the SEC filing, Goldman Sachs is listed as one of the underwriters of the Tesla offering.
Musk is an ambitious entrepreneur, and the effort Tesla Motors Inc is making to revolutionize automobiles in Silicon Valley has not only captivated investors, but has also been controversial. The main reason being – Musk and his aggressive targets. For example, this month itself, Musk announced to produce 500,000 vehicles by 2018 and 1m vehicles a year by 2020.
Many on the Wall Street believe that Musk’s targets are pie-in-the sky predictions, and act as reminders of the wild promises and other projections that were a feature of the 1999 Internet boom era that ultimately busted. The moves that Goldman Sachs’ has made also remind some of the Wall Street conflicts that were the reason behind a $1.4bn settlement over tainted research, says a report from Forbes.
That settlement led to creation of rules that separate research from investment banking at Wall Street banks. The financial institutions do not have the permission to offer favorable research, either directly or indirectly, in return for investment banking business or factor in investment banking business when compensating its research analysts.
However, Goldman Sachs states that it carefully sticks to the rules. “Our research is independent. We followed all of our standard policies and procedures with respect to our research publication today.”
Goldman – Why a buy for Tesla?
Goldman has based his valuation on “five probability-weighted scenarios plus stationary storage optionality,” all of which embed a 20% cost of capital. Over the past three months, Tesla shares have gained more than 26%, but the stock is still down 12% year to date and by about 15% over the past year. The analysts believe, the stock could rise 22% over the next six months.
Goldman believes other car firms will not pose major obstacles to Tesla Motors Inc despite the competition getting intense with the entry of many firms in the electric vehicle space such as Hyundai Loniq, Chevy Bolt and Audi Q6 e-tron. Goldman Sachs believes the Model S and Model X can hit the top five market share in their respective luxury vehicle segment, and the Model 3 have the potential to become the category leader.