Tesla Motors Inc (NASDAQ:TSLA) is a stock with high risk and high reward, note CLSA’s Andrew Fund and Emmanuel Rosner, notes a recent report on the Barron’s blog.
Tesla’s high risk-reward proposal
The report outlines the investment as a car company as a high risk-reward proposal, but doesn’t take into account the real monster upside: as an innovator in battery technology that might replace combustible engines and have uses well beyond automobiles.
“Tesla offers a high-risk, high-return opportunity with its aspirations to electrify the auto industry,” noted Fund and Rosner. One wonders where this analysis was when Tesla was trading near $50 per share and certain managed futures professionals were consistently delivering a message that Tesla Motors Inc (NASDAQ:TSLA) was going to be the next Apple Computer and build a brand respected the world over.
Fund and Rosner think Tesla will “establish a sustainable position in the industry,” and successfully face future competition. Even if competition were to develop a similar product – which is in question – could they really compete against the Tesla brand, image and product experience? This is the question that will drive its value as an auto manufacturer in the years to come.
Tesla’s stock price fluctutations
In the short term, however, we might see the stock price move both up and down, a conclusion we have previously drawn in ValueWalk articles.
“The binary outcome for the stock is likely to keep it volatile, but we expect it to ultimately trend higher as Tesla reaches new milestones that improve the probability of success,” the report noted. “With an optimistic outlook already priced in, we see moderate upside potential over the next 12 months. We initiate with an Outperform rating and a DCF-derived US$300 target price, which implies 87x 15CL EPS versus a historical average of 83x.”
Over the short term we may have seen the highs in on the year for Tesla. We previously noted that certain algorithmic traders using forward looking trend models were likely to be shorting the stock. If Tesla Motors Inc (NASDAQ:TSLA) sees a quick price decline in the near future, the slower to react momentum traders are likely to climb aboard the short side, which could be followed by the mid-term trend followers.
This doesn’t mean the stock is a dog or that it won’t rebound. On the contrary, the fundamental case for Tesla Motors Inc (NASDAQ:TSLA) – considering the large upside of revolutionary developments in battery technology – could turn this into one of the all time home run stocks: the next Microsoft Corporation (NASDAQ:MSFT) or Apple Inc. (NASDAQ:AAPL).
But nothing moves in a straight line. In the near term, Tesla could find a lower price trend at before the year is out, potentially discovering support near the $200 level. Once it reaches these levels watch for a major buying opportunity to invest in a firm operated by a true American visionary. It could be a wild ride, but riding alone someone who is making history isn’t likely to be a trip for the faint of heart.
The play over the short term could be short Tesla Motors Inc (NASDAQ:TSLA) and long Apple Inc. (NASDAQ:AAPL) going into Apple’s earnings announcement.