Shares of Tesla (NASDAQ: TSLA) rose 8% to a new record on Thursday, driven in part by a major improvement from auto analyst Joseph Spack of RBC Capital Markets. Shares continued to rise on Friday. Spack raised his Tesla stock rating to achieve a sector (retention equivalent) of lower performance (selling equivalent). Meanwhile, he doubled his price target to $ 700.
The analyst pointed to two main reasons for this change in the heart: Tesla’s ability to raise capital cheaply and increased expectations for growth over the next five years. However, none of the justifications make sense. Instead, this looks like another case of an analyst chasing Tesla shares, which has moved far into the bubble territory after rising more than 800% in the last year.
Mixed growth expectations
In connection with the upgrade, RBC raised its forecast for deliveries of Tesla cars in 2025 to 1.7 million from the previous forecast of 1.3 million. However, the new assessment still suggests a sharp slowdown in Tesla’s growth trajectory over the next few years.
Last weekend, Tesla announced that it had delivered 499,550 vehicles in 2020 – 36% more than the previous year – despite halting production at its main factory for about two months due to the COVID-19 pandemic. Since a few months ago, Tesla has installed capacity to build 840,000 vehicles a year, with more capacity in motion. During the company’s third-quarter profit call, an analyst asked if that meant Tesla was likely to ship 840,000 or more vehicles in 2021. Elon Musk agreed that was a reasonable estimate.
Based on 840,000 deliveries in 2021, Spak’s 2025 supply target assumes a complex annual growth rate of 19% over the next four years. By comparison, Musk has focused on 50% annual growth, roughly speaking. So far, he has mostly achieved this goal. With this growth rate, Tesla will deliver about 4 million cars in 2025.
It is one thing for Spack and his team to claim that Tesla shares are worth more than the rest of the automotive industry combined if they expect the company to continue to grow 40% to 50% per year for the foreseeable future. But there is no plausible argument for valuing Tesla’s shares so highly based on RBC’s targets, suggesting that the EV pioneer will still hold less than 3% global market share in 2025, with growth slowing. slows down quickly between now and after.
Circular argument on evaluation
RBC analysts also note that Tesla was able to raise capital very cheaply by selling shares in 2020. They see this low cost of capital as a huge competitive advantage, which justifies the high assessment of sales of Tesla shares by eight times in 2025. The rationale is that Tesla will be able to use its shares to finance growth and acquisitions instead of having to rely on internally generated cash flow.
However, this argument clearly relies on circular logic: Tesla has a high share price and this high share price allows it to raise capital cheaply; therefore Tesla deserves a high rating.) If Tesla’s stock drops by 75% for some reason – or no reason at all – the argument will work backwards. A sharp drop in Tesla’s share price would mean that the company could no longer raise capital so cheaply, which justifies the low share price.
A warning sign for Tesla shares?
With aggressive assumptions about Tesla’s future market share, the profitability of electric car production compared to traditional car production and the potential of ancillary business opportunities, justifying Tesla’s high rating, may be possible. Following the recent jump in shares, Tesla’s fully diluted market capitalization is approaching $ 1 trillion.
However, Spack and his team of RBC analysts expect Tesla’s growth to slow significantly in the coming years, based on their updated estimate of 1.7 million shipments in 2025. Thus, the brokerage firm’s recommendation and price target appear completely detached from fundamental analysis. Increasingly, analysts are chasing the price of Tesla shares, raising their targets simply because the shares jumped sharply.
This logic can go in both directions. Tesla looks like a bubble that increases due to pure inertia and fear of leaking. When that bubble bursts, Tesla’s stock could plummet. This withdrawal may be exacerbated by a wave of downward declines from the same analysts who have rushed to raise their price targets in recent months.