Tesla Keeps Getting Catalysts

 | Oct 15, 2013 | 11:43 AM EDT  | Comments
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People love Tesla's (TSLA) cars. Whatever the company builds, it looks like it can sell. That's the gist of the recommendation today from Wedbush, which took the stock to a Buy from a Hold with a new $240 target, up from $180, which has already been exceeded as of this morning's action.

For many old timers, this whole notion of pushing a stock because it has products people want is patently absurd. They look at how much the stock is up this year --454% - -they look at the market cap -- $22 billion -- and they say, "come on, this is absurd. It's just not right. No self-respecting analyst should get behind this stock at this level."

There's something to be said that the analyst missed it and should just move on. There's something else to be said that this company has a market cap that's a little less than half that of General Motors (GM), yet it will be lucky to sell 22,000 cars this year. GM sold nine million cars last year. So, there's simply no rhyme or reason to that valuation.

But welcome to the concept of the outyears. The essence of the Wedbush upgrade is that in 2017, Tesla could sell 150,000 Gen III, which is up 50% from what the company thought it could sell. Wedbush also said it believes that, after completing a survey of 892 people, the company could sell between 300,000 and 500,000 Gen III units. That means the company could earn $10.10 a share in 2017 vs. the $7.55 a share previously forecast, which is a pretty hefty increase. Using that analysis, the stock sells at 30x 2017 earnings which, in growth-stock speak, means that it can be considered cheap.

Plus, Tesla will have new details about its product offerings soon, including the Model X, which, again, is supposed to be incredibly popular both in Europe and Asia, where new manufacturing facilities might be built soon.

I totally get this kind of analysis because it is rooted in a simple concept: the survey subjects are willing to pay more for these cars than they would other cars, which means, again, that the market might be bigger than people thought for a car that sells for about $70,000-90,000. That means the company should be immensely profitable as it scales its product and that puts it in the orbit of BMW, Lexus, Audi or Mercedes. I can see someone arguing that those brands are worth $22 billion, so why not give Tesla a similar amount given that it's profitable already, even if that profit calculation includes sales inflated by government incentives. Again, purists hate that you can count on the incentives, but we are an anti-carbon country and I think the incentives are here to stay or could even be expanded.

But the true significance of this upgrade should not be lost on people. Tesla's a cult stock that, I believe, like fellow cult stock Netflix (NFLX), will keep going higher as long as there are catalysts. We know in the case of Netflix that new productions, potential build-ins to set-top boxes and growing subscription numbers will keep moving that stock higher.

That's similar to Tesla. This stock has moved up on the blessings of Consumer Reports and AAA. It's gone up on excellent publicity and terrific showmanship that has brought customers flocking to its showrooms. It has gone up on buzz, a buzz that wasn't cooled by a Tesla that caught fire.

As long as that love continues, love for the stock continues. We all know anecdotal stories about the love of both Netflix, whether it be how much people enjoyed "House of Cards" or "Orange is the New Black," the homegrown productions, or Tesla where you have an incredible OMG factor when you try one. I know when I drove a Tesla I wanted one, even as it wasn't practical for me. My daughter tried one when she was home for vacation and she is urging me to let her buy one. I am demurring because of the cost. But I totally get the love and that love is translated immediately into the stock.

I say, purists, listen up, these stocks trade on adoration for the product and a belief that ultimately everyone wants a Tesla and everyone wants to be a subscriber to Netflix. In that world, you can understand why the stocks won't quit.

At some point this game ends. I don't know when. But at any given moment there are always a couple of stocks that defy traditional stock analysis. These two, plus Amazon.com (AMZN), are in that pantheon. To get in the way of them is suicidal, even as to go with them seems absurd for anyone from a rigorous securities background.

But sometimes, it just doesn't matter. This is one of those times.

Columnist Conversations

Just some resistance to be aware of. Not saying it will cap the market, just that it is there for a decision....
Shares of Amazon (AMZN) are trading down below the 50% retracement level of their 2014 range in the after-hour...
Conclusion LNKD has a strong upward trend in revenue, has maintained very high gross margin % even as revenues...
Kass:
On the weaker than expected #s. From $143 to $106.

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