I'll share my Jan14 and Jan15 price targets and then follow up with some additional thoughts. I usually update my price targets once a month personally, so these numbers are just current forecasts as of today and can (probably will) change at any time. Disclaimer: these price targets are just personal and I share them not to give advice but rather to ask for feedback and stir discussion.
Jan 2014
TSLA market cap: $21.5-29 billion
TSLA stock price: $175-240 (target: $210)
Jan 2015
TSLA market cap: $32-41 billion
TSLA stock price: $270-350 (target: $310)
Alright, now for my additional thoughts:
1. Fundamentals
I try to base my market cap forecasts off of real numbers (ie., projected revenue, earnings, P/E, etc). I shared a post last week,
Long-Term Fundamentals of Tesla Motors - Page 25, and it shows my current thinking on how/why I think TSLA could be valued at $20-30b right now. And also how I can see TSLA valued at $40b in Jan 2015. Sometimes, I think my Jan15 $40b could be conservative if people believe the Gen III dream and give a higher P/E multiple than 50. But then again, the economy could tank, demand for Model S could stall, or Tesla could fail to execute (I'll cover these risks in a later point).
2. Momentum trading
There's a lot of speculators and people riding momentum stocks. That's to be expected. And there could reach a point where TSLA's valuation is propped up beyond realistic fundamentals (even in my modeling). I personally don't think we've reached that point (see #1), but I could imagine it get there. In that case, there could be risk of TSLA dropping significantly purely off of sentiment changing. This could happen if TSLA disappoints in a quarterly report or if TSLA's growth trajectory slows. But if TSLA keeps executing and demand for Model S grows, then momentum trading can take TSLA way beyond my expectations. At a certain point, that stock price growth needs to taper, stall, or dip, but that could take a while.
3. Economy
There are major risks to TSLA's stock price if the economy flutters/tanks or if the market goes through a major correction. This is a real risk and could throw off all my forecasted price targets. My price targets assume that the economy/market does not tank, Tesla executes well, and that demand for Model S is robust. If the economy/market tanks, then people's sentiment toward stocks in general and also toward high-growth stocks could change significantly. People will likely be drawn to safer assets and will not give the same multiples to equities. Thus, this could derail the epic TSLA rise and put it in a rut for a while. I'm confident though as the economy/market recovered, TSLA would be quite fast to recover (ie., this would be a huge buying opportunity).
It's very tough to forecast a recession or large market correction, and it's even more difficult to get the timing of that forecast correct. Further, the market most often prices economic downturn risk into the market prices, thus one needs to outsmart the general market in predicting the next recession or major correction. Even the best have mixed track records on predicting the timing of recessions and market corrections.
I do personally think there's risk (though I'm still processing the size of the risk) of a large market correction in the coming months. If the Fed starts tapering and the economy starts to dip, people might get scared. I think one scenario is the Dow drops to 12500-13000 as the market mood turns sour. I personally think the economy is still fairly solid, so I don't imagine the Dow staying down there for more than a few to several weeks. But who knows. Currently though I'm not seeing a large market dip/correction as big enough of a risk for me to hedge my positions. Yet. The risks could rise and my mind could change. But as it currently stands, I'm fully in on stock, ITM LEAPs, and some ITM options. So, even if the stock dips 30% and stays there for months (though I don't think it's likely), I'm in a position to wait it out for a very long time (my ITM LEAPs are Jan15). However, if I'm doing short-term option plays, I'm going to consider the broader market risks a bit more in whatever risk-reward probabilities I consider. It probably won't stop me from going in and buying options during some 20% TSLA dips, but it will make me think about broader market risks a bit more.
The overall market/economy is a tough thing to read and call. Sometimes sentiment can be so fickle. But my foundational investment thesis is optimistic in the long-term on the U.S. and world economies.
4. Why demand matters
As an TSLA investor I view demand as perhaps the greatest indicator for the prospects of the stock and company. The reason why demand is so important is because it largely determines the growth trajectory of the company, and the growth trajectory of the company will largely determine the P/E multiples investors will give, and that will determine the valuation of the company. In the Q2 ER, Tesla did share about production constraints (which could be serious if they can't meet demand in long-term) but Elon felt confident that they would overcome production bottlenecks and test the limits of demand sometime next year. This is good news.
When demand for the Model S grows, this is very, very good for TSLA (stock price). The reason being is that when demand grows, that means there's more people to buy the Model S, which means more revenue, more profits, etc. However, the powerful thing about growth is that it is compounded. So, when demand for the Model S grows, it means that the revenue Tesla will likely have in 3-4 years is immensely larger than if demand for Model S had stagnated. This is why for me it's very important to be in touch with Model S demand, and when demand grows to acknowledge the profound effects it could have on the valuation of the company.
For example, in 2012 it appears Tesla was estimating demand at 10-15k Model S in the U.S. Then, in Q1 ER, they said 15k units. Now, in Q2 ER they're saying 20k units fairly confidently. When Tesla was estimating 10-15k Model S in the U.S. that would be maybe 25k worldwide for Model S. Model X might be 20k. That would mean 45k units/year. Now if demand for Model S is 20k units in U.S., and worldwide it's 50k. Then, Model X will likely be 40k. So, you have 90k units/year. That's double. What that means is that TSLA will have double the revenue (in a few years) then they would have if they reached their earlier projections. The double in revenue profoundly changes the growth trajectory of the company and allows it to enter Gen III projection with more stores, more service centers, more customers, bigger/better brand recognition, more production experience, better margins, more cash, higher market cap (good for capital raises), etc. In other words, it dramatically increases the probability that Gen III will come to market successfully, and it dramatically increases the initial market size for Gen III. This in turn, dramatically increases the valuation of the company, deservedly so because the enter Gen III at a higher growth trajectory and as a stronger company.
In 2012 I was encouraged by the Elon Musk CEO incentive plan that had forecasted a $43 billion market cap within 10 years. In my opinion, that was reasonable based on the worldwide demand of Model S at 25k units/year (45k units Model S/X). However, with worldwide demand much larger (it appears), I think it dramatically increases the valuation of the company as I shared above. Thus, I wouldn't be surprised if we see a valuation of $50-100 billion for TSLA when Gen III reaches full production (2018-2019?). But again, this is all personal opinion and speculation at this point. Take it as that.
I'm also encouraged that Elon and co. seem to be confident in the growing demand for Model S (this is mentioned several times in Q2 ER shareholder letter). Elon and Deepak also mentioned it in the conference call as well when one analyst questioned them about how new models drop in sales over time. They were quick to answer that they don't think that will happen with the Model S, and that they were confident that demand would grow.
This might be off topic a bit but I was thinking about how Elon has mentioned that people tend to overestimate demand at the introduction of a new technology and then they tend to underestimate demand when the technology matures. I find this quite fascinating. Both Nissan and Chevy seemed to have overestimate the demand for their EVs. It seems like Tesla has avoided this mistake. With the Roadster, they produced such small quantities (maybe to respect the reality that overestimating demand could be fatal to the company). Also, with the Model S it appears Elon was conservative with demand estimates, not wanting to overestimate demand. However, it seems like demand is surpassing expectations. To me, this means that Elon and co. will need to expand their expectations of demand 10 years out. In other words, they don't want to make the mistake of underestimating demand for Gen III. China is definitely the wildcard IMO, and I think they can sell far more Gen III vehicles in China than the even the U.S. (even though they'll sell a ton in the U.S., Europe, etc). China's market is just so big. I can see Tesla management already thinking about making a factory there to avoid foreign import tariffs that make the Model S more expensive. And then they can use that scale that factory at due time for Gen III production as well.
5. The market is ruthless to high-growth stocks that aren't growing as fast anymore
As much as investors will give incredible P/E multiples to fast growing companies that are in a trajectory toward dominance, the same investors (the market) are ruthless when a company underperforms and shows that their growth trajectory is slowing. When growth slows, this removes the compound growth incorporated into the company's future projections and dramatically shrinks the future potential market cap of the company, thus dramatically shrinks what kind of P/E multiple investors are willing to pay today. Though I'm not terribly worried about this risk because Tesla is playing in one of the world's biggest markets and has a ton of space to grow, this is serious risk in case Tesla fails to execute in a serious manner.
6. Final thoughts on TSLA price
In summary, my price targets (ie., Jan14 target) are my personal opinion and are assuming the market/economy remains decently strong, Tesla continues to execute, and demand remains robust. Some of the things that will help the stock continue it's epic rise IMO are:
1. High short interest remains, thus offering the inevitable reality of the shorts eventually covering and forcing available shares to become more scarce.
2. Tesla will likely grow in visibility as more and more people learn about the company and cars.
3. More Model S owners and friends will likely invest in the company.
4. More funds and institutions will invest in the company, especially after a 2nd profitable quarter.
Some challenges (besides economy/market and TSLA execution) to reaching my Jan14 price target are:
1. Bad news on European demand or U.S. demand stalls/shrinks.
2. Major safety defect or recall.
3. Analysts turn bearish in general affecting mood/sentiment around stock.
4. "Short TSLA" movement is successful in spreading FUD and executing short attacks on stock to turn mood negative.
(*there are a ton of other risks, you can read TSLA's annual report to view some more.
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Would love to hear your thoughts and share in more discussion.
So, what do you guys think?
