How Tesla Investors Should Approach Analyst Upgrades, Soaring Stock

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It’s hard to find a reference point that would give investors a sense of Tesla’s large valuation.

Tuesday, analysts at Oppenheimer raised their price target on the stock to $600, representing roughly 20% upside from the stock’s current level. Oppenheimer said the electric vehicle innovator has now reached large enough scale to support the ability to generate free cash flow. Tesla can now moderate the growth of operating expenses and focus on profitable growth, a trend it showed with overwhelming strength in its third quarter earnings report.

The analysts also mentioned he sees a tremendous growth opportunity continuing to be a theme, as demand looks strong and Tesla has shown the ability to execute on its manufacturing schedule.

After years of losses, analysts are looking for a strong and growing stream of profits, on both an earnings and free cash flow basis.

Now, there’s far more clarity on Tesla’s price-to-earnings multiple, which stands at 76 times its expected 2020 earnings per share of $6.64.

That’s certainly a growth valuation, but it’s not like there is another Tesla out there to compare against. So how do investors know if that’s an appropriate valuation?

Wedbush analysts, who have a $370 price target but are open to the bull thesis on the stock, suggest several groups of stocks to compare against. 

Those include big tech, centering on Apple and Google, ridesharing, clean technology and automakers. But each business is its own, with different growth rates, different cost structures and different phases of business life cycle. Big tech certainly has its growth drivers, but the earnings multiples are below 30. Many analysts argue that’s too low a valuation, but those multiples certainly aren’t moving close to Tesla’s. Uber and Lyft aren’t yet profitable. One can compare price-to-sales, but the electric vehicle business and ridesharing still have their differences. And while some automakers are indeed competing with Tesla in EV’s, most of them are nowhere near weighted heavily towards EV’s and they all trade at earnings multiples below 10.

Tesla stock may keep going higher, but investors should understand the risk, of which there is plenty.