- Tesla's stock has rewarded shareholders this year by soaring over 600%, but it is likely to become more volatile as the stock is just two weeks away from entering the S&P 500 index.
- Tasha Keeney, an analyst at ARK Invest and Tesla's biggest bull on Wall Street, said in an interview that the firm stands by its 2024 price target for Tesla, which is $1,400 a share post-stock split.
- Business Insider also spoke to Interactive Brokers' chief strategist Steve Sosnick about the various factors contributing to the high probability of volatility around Tesla going forward and reviewed Goldman Sachs analyst Mark Delaney's latest research note on his Tesla upgrade.
- Visit Business Insider's homepage for more stories.
For faithful shareholders of Tesla, 2020 has been an extremely rewarding year, with the stock trekking up a whopping 615% as of Friday. For anyone on the other side of the bet, the last 12 months have been painful, to say the least.
Despite its meteoric rise, many on Wall Street think that Tesla still has more room to run.
The latest analyst to place a vote of confidence is Goldman Sachs' Mark Delaney, who on Wednesday upgraded Tesla to Buy from Neutral and raised his 12-month price target to $780 from $455, implying another 42% upside.
His view hinges on the accelerating shift toward battery-powered electric vehicle, from which Tesla is poised to benefit.
"We believe that battery prices are falling faster than we previously expected which improves the economics of EV ownership," he said in a research note, adding "there has recently been an increase in regulatory proposals from some jurisdictions to limit or ban the sale of new internal combustion engine (ICE) vehicles entirely in 10-20 years."
As a result, Delaney is projecting EVs to comprise 18% of car sales globally in 2030 and 29% in 2035, with Tesla being the leader of the pack.
"If Tesla sustains its mid to high 20% range share of the EV market, then it could reach 15 mn units by 2040 (and about 20 mn under our upside-case EV market adoption scenario)," he said.
The biggest bull
Delaney's price target of $780 is the highest on Wall Street compared to the $403 average 12-month price target based on 25 analysts' forecasts, according to TipRanks.
But his bullishness on the stock still trails that of ARK Invest, which is forecasting an expected value of $1,400 per share by 2024.
The innovation-focused asset manager's lofty target price for Tesla has met a lot of resistance from Wall Street over the years. But as the skeptics come around, they might have overlooked Tesla's biggest potential — its autonomous driving opportunity, according to ARK analyst Tasha Keeney.
"From our perspective, the autonomous taxi market is a market that should be measured in the trillions globally," she said in an interview. "We now know that autonomous cars are possible and they're on the road today, so this is a product this is a solvable problem from that perspective."
Although the fully autonomous vehicles may come later than CEO Elon Musk had promised, Keeney sees that segment of the business as game-changing for Tesla.
"It could dramatically change the business model and really how you value the company," she said. "The margins will be much higher. We think that that piece of the business could even deserve a higher multiple than just an electric vehicle company."
To lay the foundation, Keeney thinks Tesla should launch a human-driven ride-hailing service to accelerate its autonomous strategy and de-risk its financial model.
"It's a way to transition the business model into that recurring revenue stream and we think that could add a significant amount to Tesla's earnings," she said. "They could do this more competitively than Uber and Lyft because they have vertical integration on the insurance side. They can also offer financing to the drivers, and the cars are actually also cheaper to drive on a per-mile basis."
A day of judgment for Tesla
As long-term investors, ARK's price targets and forward-looking projections are anchored to a five-year investment horizon. But Tesla is faced with its own day of judgment in just two weeks.
At the close of trading on December 18, the storied EV-maker will officially join the S&P 500 index at about a 1.2% weight, the largest public company ever to enter the premier US large-cap index.
Since news of the inclusion came out on November 16, Tesla's stock has surged more than 30% and picked up over $200 billion in market cap.
"The trajectory of the stock is pretty similar to that of a SpaceX rocket; it's pretty straight up," said Steve Sosnick, the chief strategist at Interactive Brokers, in an interview. "So if you've held it, you've been rewarded, and you're not likely to sell. There are true believers in Tesla and they're not incentivized to sell."
However, investors should consider how much of the new Tesla buying has been done by speculators trying to front-run index addition, according to Sosnick.
"The market value that Tesla has added since it was announced that they're going into the index is way bigger than the amount of stock that needs to be purchased by indexers," he said. "And what does it do to the other 499 stocks in the S&P 500?"
He explained that S&P 500 index funds, which tend to own very little or no cash, would have to sell the other 499 stocks in prorated amounts in order to make room for Tesla, which could also ramp up volatility on the S&P itself.
Another substantial downside risk investors might have missed is that companies or their insiders could also sell shares into index announcements in order to raise capital.
"It's not unheard of for either companies themselves to raise cash by selling stock into an index announcement or for company insiders to raise cash by selling into an index announcement," said Sosnick. "Tesla has continued to be a company with a high demand for cash and what a way to raise some of it at perhaps the most opportune moment ever, selling into what is likely to be a lot of forced buyers."
"You can anticipate that there will be demand for the shares, that demand has to be satisfied by Friday the 18th," he added. "If everybody's waiting to sell into this buy program … the rush of demand, if it's too easily met, that creates downside of the stock as well."
One of the many skeptics
While many investors seem to agree that Tesla will inevitably run up until the index inclusion, some are focusing on what could happen after the inclusion takes place.
One of them is Neil J. Hennessy, chief investment officer of Hennessy Funds, who reads Tesla's current valuation as "completely wacko."
"With the inclusion going into the S&P 500, all the indexes are going to have to buy it, they're going to have to buy it and hold it, and boom, it's going to run, it has to," said Hennessy in a market outlook press briefing on Wednesday.
"On the other hand, once that buying is done, it's over. So what's going to stop them from going lower, I don't see anything," he added. "At some point in time, reasonableness is going to come back into a company like Tesla. But right now, it's an emotional trade."
Get the latest Goldman Sachs stock price here.
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