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Industry Spotlight

Why Tesla’s share price is soaring as the auto industry stalls

Late last year, the technology giant and electric car producer headed by the enigmatic Elon Musk reported a surprise profit for Q3 2019. Since then, Tesla’s [TSLA] share price has been on a colossal climb that few could have predicted. As of market open on 22 January, the stock has gained 128% since the Q3 announcement on 23 October. 

The dramatic rise in value was first triggered by the carmaker crushing analysts’ consensus estimates of a $0.42 loss per share, instead reporting earnings of $1.86 per share, prompting a 29% pop in share price value throughout the rest of that week. Since the beginning of December 2019, share price gains have rapidly accelerated. 

As well as the solid earnings, investors and traders were also encouraged by the potential of the company’s China factory, which Tesla has announced is ready for production, having been completed in just 10 months. All in, it cost around 65% less to build than the company’s Model 3 production system in the US. 

Momentum was quickly on the firm’s side as stories of crushed short-sellers filled column inches. These shorts exiting their share price positions triggered an aggressive short squeeze.

 

When is the end?

It may not be over yet. “With 2020 losses mounting, we should see a continuation and probably an acceleration of Tesla's multi-month short squeeze,” Ihor Dusaniwsky, the managing director of predictive analytics at S3 said in a note issued on 13 January. 

Analysts have meanwhile continued to lift price targets for the firm, as gains have also been supported by a wider bull market in stocks. 

Last Tuesday, Jefferies analyst Philippe Houchois raised his price target to $600 from $400, following an increase of $612 from $385 by Oppenheimer analyst Colin Rusch. 

Deutsche Bank analyst Emmanuel Rosner, however, struck a more conciliatory note, raising his price target to just $455 from $290, representing a loss in value. 

“Tesla truly seems to be currently firing on all cylinders,” Rosner wrote in a note. “But with the stock hovering around all-time highs, we worry investor sentiment has gotten bullish too fast, ignoring some of the nearer-term execution risks.”

Problems include the fact that a short squeeze has fueled part of the gains and the fact the company is trading 115 times its consensus forward earnings, according to Morningstar. The carmaker is meanwhile now valued far higher than many of its far more established rivals. These companies, including Ford [F], GM [GM] and BMW [BMW], make far more cars yet have been experiencing share price stagnation or declines over the past year.

 

Market cap$104.29bn
Forward P/E97.08
EPS (TTM)-4.77
Profit margin-3.39%

Tesla share price vitals, Yahoo finance, 22 January 2019

 

The firm’s market cap is now near 2.5 times that of Ford. Tesla is meanwhile valued at more than 90 times that of Aston Martin Lagonda [AML]. We take a look at these two very different automakers, which have been making UK and US headlines recently:

 

What happened to Aston Martin Lagonda?

Since becoming a publically traded company in 2018, the British luxury carmaker has been crushed. With an IPO value of 1,900p, the carmaker has lost 74% of its value. Its first full year of public trading last year was a disappointing one for the firm. Adjusted earnings came in at £130m to £140m, according to its 7 January earnings update, far lower than the £200m expected by analysts. Wholesale orders were meanwhile down 7% despite sales by dealers growing 12%. 

“It was a bloody difficult year, made more difficult by the operating environment around us,” chief executive Andy Palmer told the Financial Times. 

Furthermore, it doesn’t look like things are going to improve anytime soon. The carmaker issued a profit warning and announced it will raise a further $100m of high-interest debt financing at the start of the year. That’s on top of $150m in debt bonds already raised in September 2019, for which it is paying a 15% rate.

$150million

Value of debt bonds Aston Martin raised in September 2019

 

Changing of the guard?

Ford’s share price has spent the past six years in decline, having lost 40% of its value since 2014. During that time sales have decreased, as demand in China has rapidly plunged and sales in Europe and South America have stagnated. But 2019 was a rare year of growth for the automaker, with its stock closing the year up by 23.5%, rising from $7.53 to $9.30. Can this continue in 2020? 

As of 22 January, the stock had slipped 2.2% year-to-date. But while the path to boosting sales in China seems a difficult one (that will likely not be rectified in 2020), North America sales are expected to solidify and profits grow, aided by the release of a series of new models. This could help maintain the stock until the China problem is solved. The current price also means that Ford has a juicy dividend yield of 6.5% and a forward consensus P/E ratio of just 6.9, according to Morningstar.

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