Tesla's stock has soared nearly 50% in the past month. But how sustainable is this rise, and how should one value Tesla?
There are multiple analyses on the market.
Is Tesla an AI stock?
Some believe that Tesla is benefiting from the AI wave. For instance, Adam Jonas, a Morgan Stanley analyst who has long been considered Tesla's most enthusiastic Wall Street proponent, suggested that the market first wants to believe Tesla is an AI brand, before recognizing it as a car company.
Data shows that since the AI wave triggered by ChatGPT at the end of last year, retail investors' enthusiasm and investment in Tesla have closely mirrored that of AI concept stocks, with investments even exceeding those in AI concept stocks.
Does Tesla's promise of a robo-taxi service overvalue it?
Some have interpreted the situation from the perspective of autonomous driving.
Canadian Royal Bank analyst Tom Narayan published a report last week using a new valuation method. This method doesn't place much value on Tesla's main business of car manufacturing but attributes considerable value to Tesla's promise of a "robo-taxi" service, which could potentially replace some cars. This valuation method isn't new, but it's gaining renewed attention.
According to Narayan's valuation method, Tesla's target market value could exceed $1 trillion, with the car business (Tesla's current main business) valued at around $900 million. The valuation of fully autonomous driving stands at $2.4 billion, and the future "robo-taxi" business has a potential valuation as high as $7.3 billion.
Relying on Tesla's robo-taxis today requires having faith in Tesla, as the technology is in the experimental stage and Tesla isn't even one of the most notable testers. While Musk has discussed robo-taxis, Alphabet's Waymo and General Motors' Cruise have already started operating their fleets in cities like San Francisco and Phoenix.
Is FSD the key to boosting the stock price?
Stepping back, many investors are bullish on Tesla because of the expansion of its existing driver-assist package, known as Full Self-Driving (FSD). This software provides another reason for investors to view it as an AI company. Tesla currently charges $15,000 for FSD, but since the product is still in the testing phase, its revenue isn't counted as part of earnings. However, with the technology making significant strides toward broader deployment in the last quarter, more investors believe that it will boost Tesla's stock price.
That being said, even if FSD shows improvement, giving Tesla a high valuation solely based on it is questionable. In the past, cutting-edge automotive technologies have only enjoyed a premium before competitors catch up. There's no reason to believe FSD will be different. It allows drivers to take their hands off the wheel, but not their eyes off the road, so it falls short of true "autonomous driving." Besides, many major automakers have released or are about to release similar technologies.
Did General Motors and Ford joining Tesla's charging network cause the stock surge? Moving away from AI, Ford and General Motors' decision to use Tesla's Supercharger network coincided with the recent rebound.
These deals should help Tesla get better returns from its fixed assets. But considering the massive investments going into rapidly growing independent charging network companies like EVgo, investors have never really shown much enthusiasm for this kind of business.
Claiming that these deals reveal the huge profit potential of Tesla's charging business seems a bit disproportionate.
Can Tesla's strong rebound be sustained?
All these threads can be woven together to portray Tesla as a technology ecosystem with multiple revenue streams rather than just a car manufacturer. Dan Ives, an analyst at Wedbush Securities, believes Tesla is at an "AWS moment," similar to when Amazon launched the high-profit, attention-grabbing AWS cloud service and integrated all its businesses, drawing in investors and boosting its stock price.
However, some analyses suggest that this analogy is essentially inaccurate. Tesla does have some side businesses such as charging, but nothing appears likely to scale like Tesla's cars and become another cash cow in the foreseeable future.
Regarding the recent surge, Wall Street offers more pragmatic explanations. Ben Rose, an analyst at Battle Road Research, believes that the rebound began when Musk appointed the new CEO of Twitter, alleviating concerns about him being distracted by his purchase of Twitter last year.
Additionally, Tesla updated its website this month to show that all its vehicles are eligible for full tax credits from the U.S. government, a change from previously when most models only qualified for half of the tax credit. This change might reflect adjustments in the supply chain and could help the company maintain growth without further price cuts and profit reductions. If Tesla's earnings in the second quarter show signs of stabilization, analysts might begin to increase their target prices, which they've been reducing for about the past six months.
When analyzing Tesla, a hot stock, the market often places more emphasis on far-off, science fiction-like technologies than on fundamentals. This is a primary reason why predictions about Tesla are so varied.
But the second-quarter results due next month could bring the market back to basics. Whether the earnings are good or bad, they might remind investors that Tesla is still a company mainly dependent on car sales and will remain so for many years to come.
