Tesla stock, which closed down almost 8% in regular trading on Monday, was trading higher in US premarket trading today. Nasdaq futures were also up slightly after the sell-off yesterday.
Tesla ended its 11-day winning streak amid the broader sell-off in US tech stocks. The tech-heavy Nasdaq Composite Index underperformed the S&P 500 and the Dow Jones yesterday. Companies like Zoom Video communications and Apple, which were among the biggest gainers in 2020, lost heavily on Monday.
Analysts hold a divergent view of Tesla
Analyst opinion has always been very divergent when it comes to Tesla. On one side of the spectrum are some analysts that see the stock a way too overvalued. JP Morgan, for instance, expects the stock to fall 90% from these levels and called the stock “dramatically overvalued.”
Even Ashwath Damodaran, also known as the “dean of valuation” values Tesla stock at a fraction of its current stock price. He said, to justify its valuation the company would need to make revenues similar to Volkswagen with margins like Apple and make investments in manufacturing “like no other manufacturing company has before.”
Ashwath Damodaran
“They’ve got to figure out a way that they become part-software, part-car,” Damodaran said of Tesla He added: “That is the only way you can get to those margins. … some people believe strongly enough in that story that they’re willing to invest at this price. I just think that’s a bridge too far.”
Last year, Michael Burry of The Big Short fame revealed that he’s short on the Tesla. His bet against CDOs (collateralized debt obligations) brought him into the limelight. However, Tesla shorts had a hard time in 2020 and lost $40 billion betting against the Elon Muck-run company. That’s the biggest loss short-sellers have ever made on a single stock. The stock rose a massive 740% last year which prompted many short sellers including Jim Chanos to cover some of their positions and cut losses.
Some analysts are bullish on Tesla
Meanwhile, on the other side of the spectrum are analysts that see value in the electric vehicle maker at every price level. Credit Suisse analyst Dan Levy has also joined the league of analysts that are bullish on the stock and doubled his target price to $800. He pointed to the $12 billion capital raise that the company did in 2020.
Tesla raised$12 billion by selling stocks
“With Tesla raising $12bn in ‘20 and not seeing a dent in the stock, it implies Tesla’s cost of capital is negative – the market is paying Tesla to take capital,” said Levy. He added, “This is a significant advantage vs. other automakers, and Tesla has the funds to expand capacity as much as it desires.”
While mainstream automakers like Ford are grappling with a huge debt pile, Tesla turned negative on net debt after its capital raise. It now has more cash than debt on its balance sheet and can use the cash to fund its growth pursuits including the upcoming Gigafactories in Berlin and Texas.
BofA analyst John Murphy also raised his target price from $500 to $900. He argued that “the higher the upward spiral of Tesla’s stock goes, the cheaper capital becomes to fund growth, which is then rewarded by investors with a higher stock price.”
NIO also on a capital raising spree
Tesla is not the only automaker on a cash-raising spree. Chinese electric vehicle maker NIO also issued shares thrice last year through ADS (American Depository Share) issuance. It also issued convertible debt twice in 2020 and also won a strategic investment from Hefei Municipal Corporation.
Yesterday, it announced another $1.3 billion issuances of convertible debt. In a reflection of how things have changed for NIO that many expected to bankrupt, its stock rallied sharply yesterday on news of capital raise. In contrast, the stock had fallen in 2020 when it announced the issuance of convertible debt.
Is Tesla the next trillion-dollar company?
Tesla’s market capitalization is now only about 25% short of the $1 trillion level. Looking at the momentum in its shares, it looks firmly on track to achieve that feat. Notably, Gene Munster, who had correctly predicted Apple hitting a $2 trillion market capitalization, expects Tesla’s market capitalization to hit $2 trillion over the next three years.
Elon Musk’s net worth
The sharp rise in Tesla’s stock price briefly made Elon Musk the world’s richest person ahead of rival billionaire and Amazon’s CEO Jeff Bezos. Last year, Musk also unlocked billions of dollars of Tesla stocks as compensation. While he does not get any salary or bonus from Tesla, his compensation is only in the form of stock options that are linked to the company achieving several milestones. The metrics are related to revenues, EBITDA, (earnings before interest, tax, depreciation, and amortization), and Tesla’s market capitalization.
Incidentally, Musk created a record in 2020 after becoming the first person ever to add over $100 billion to his net worth in a year. Chamath Palihapitiya sees Tesla stock running even higher and also talked about the possibility of Musk becoming the world’s first trillionaire.
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