New Street Research analyst and Tesla bull Pierre Ferragu raised his Tesla price target to $800 a share, the highest on Wall Street. And he sees a path to more than $1,100 a share over the next few years.
That would give the electric vehicle pioneer a market value approaching $200 billion.
Ferragu initiated on Tesla (ticker: TSLA) in May 2018 with a $530 price target. With the stock at roughly $280, it was a bold call. And Ferragu had to endure shares dipping below $200 a year after his report was published.
But things turned around. Tesla stock is up more than 110% over the past three months, closing Tuesday above $540 a share. Ferragu, for his part, isn’t stopping to take a victory lap. He sees more gains for shareholders for the next few years. His updated investment thesis is built on three pillars: technology leadership, product appeal and improved manufacturing excellence.
“Tesla achieved 40% cost [and] range performance improvement over the past seven. Competition is lagging,” Ferragu said in a Tuesday research report. He thinks Tesla has a lead on “every single element” of the electric drivetrain: battery chemistry, battery architecture, power inverter and motors.
Ferragu also sees the more modestly priced Model 3 expanding beyond the luxury-car market. “Tesla’s ultimate addressable market of about 20 million units leave ample room for growth.” Tesla delivered about 360,000 cars in 2019.
The third pillar—improved manufacturing performance—was evident when Tesla reported better-than-expected third-quarter earnings, which catalyzed the recent stock price rally. “We expect a strong free cash flow beat next week,” he said.
Tesla will report fourth-quarter numbers on Jan. 29 after the market closes. Investors will want to see positive free cash flow for the third straight quarter. Tesla has generated positive free cash flow in four of the past five quarters.
Ferragu’s higher price target isn’t a function of anything Elon Musk will say on the company’s fourth-quarter earnings conference call. Instead, he is betting on what the company will look like far into the future.
“We estimated that by 2025, Tesla could produce and sell 2 to 3 million cars, like other premium brands and in line with BMW today,” Ferragu wrote. “A $40,000 to 45,000 average selling price results in $80 to $120 billion auto revenues.”
BMW (BMW.Germany) sold about 2.5 million vehicles in 2019, generating about $112 billion in sales. Tesla is expected generate about $30 billion in sales in 2020. If Ferragu is correct and sales expand by a factor of 4, he thinks shares will trade between $1,100 and $1,700 in 2025. That is a very long-term price target. His $800 target is the forward 12-month outlook.
It is another bold call. And Ferragu is one of the biggest bulls on Wall Street. Excluding his target, the average analyst price target is about $360, down 33% from recent levels. Not everyone agrees Tesla stock will keep going higher. In fact, only about 30% of analyst covering the company rate shares the equivalent of Buy, far below the average buy-rating ratio for stocks in the Dow Jones Industrial Average.
Ferragu, of course, knows the bull-bear spread remains wide. “The stock will remain volatile,” he wrote. “God only knows what the next controversy will be,” he said, noting short interest has declined significantly in recent months.
Short sellers will borrow and sell shares, betting on price declines. Short sellers rushing to cover bearish bets can add to the magnitude of a stock-price rally.
Regardless of whether you are a bull or a bear, Tesla’s recent stock run has been something to watch. It closed up more than $36, or 7.2%, on Tuesday to $547.20 a share, on a day when the S&P 500 dropped 0.3%.
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