Tesla Motors Inc (TSLA) Stock: Ignore The Analysts, Follow The Consumers

Cars of Tesla Motors Inc are a customer favorite, but analysts continue to remain skeptical of TSLA stock.

  • Only consumers understand Tesla Motors Inc.
  • Analysts favor the old Ford and GM business models.
  • Look at consumer behavior to invest in Tesla.

There is a very good academic paper concerning how analysts' recommendations do not favor disruptive business models. There is a tendency for analysts to support existing technologies. Why? The simplistic models they use cannot handle change. I have personally had this view every time I hear an analyst yak, even when I used to work for a financial advisor. It is nice to see some research on this topic. Although the research is done from the perspective of an incumbent firm attempting to adopt disruptive technologies, I decided to view this finding from the disruptor's perspective. I chose a well-known disruptor, Tesla (NASDAQ:TSLA).

Tesla Finds Favor With Consumers But Not Analysts

Consumers from different parts of the world such as Europe and Norway have accepted Tesla, but analysts have not. Why? Tesla's business model is so unique and different. Analysts do not know what to do with it. The complaints are so predictable. Here are a few of the recent ones below.

"Ronnie Moas of Standpoint Research sent the automaker's share price falling 2.77% to $250.07. The analyst's parting shot that it would take Tesla five to 10 years before reaching its April 17, 2016, valuation"

"Pacific Crest analysts said the Model X appears to be "lagging expectations.""

RBC Capital Markets, Joseph Spak and Jacob Hughes...added, there was "little to change the narrative bears express over Model 3 ramp and SCTY (SolarCity) concerns."

However, because they act as an intermediary, their opinions are taken as gospel even if they have no idea what they are talking about.

Also read: Tesla Motors Inc (TSLA) Hits Rare Home Run After Activating The Gigafactory

Analysts Favor GM and Ford Stock

Though Ford has been a laggard, analysts are suddenly bullish on the stock. Why? Since Ford is an old, established company, they can easily explain it in their models.

"We see profit expanding in 2016, as Ford benefits from new products and favorable mix, and improved international margins outside South America," says Efraim Levy, equity analyst at S&P Global Market Intelligence

Rod Lache, equity analyst at Deutsche Bank ... came up with six "bullish takeaways". Lache points out that (1) Ford's management continues to be upbeat on the company's growth prospects in North America, (2) Fears that the U.S. auto market has peaked are excessive or overdone, (3) The market underestimates the benefits that Ford will reap from the near-term market shift toward SUV's, (4) Management is committed to maintaining profitability through cost-cutting and pricing measures if a market downturn occurs, (5) Ford is exploring significant new revenue opportunities, and (6) Management believes the market is already pricing into its stock the worst-case recession scenario.

Rod Lache's six points are my favorite. His bullet points focus on management's beliefs of the future and his forecasting model, especially bullets 4 through 6. Why? It is easier for Lache to come up with an alibi if his analysis fails. Compared with the analysts' remarks on Tesla, analysts are happier with Ford because it is focused on revenue and earnings. To grow a business, those factors may have to be delayed in order to attract customers. Wall-Street does not get that at all.

GM's upbeat recommendations are along similar lines to those on Ford.

Analysts are expecting GM to turn in lower earnings on slightly higher year-over-year revenues, but that didn't appear to stop some of them from upping their per-share projections...

It does seem to me that we have strong evidence of favoritism on established versus disruptive business model by the analyst community.

Also read: Buy Tesla Motors Inc (TSLA) Stock Now Or Regret It Later

Different Business Models

The descriptions of the respective business models of GM and Ford may indicate why. The business model descriptions are identical among established firms.

GM: We design, build and sell cars, trucks, crossovers and automobile parts worldwide. We also provide automotive financing services through General Motors Financial Company, Inc. (GM Financial).

Ford: our core business includes designing, manufacturing, marketing, financing, and servicing a full line of Ford cars, trucks, SUVs, and electrified vehicles, as well as Lincoln luxury vehicles.

Now let's check out Tesla's business model. Notice the difference. The description is much different compared to the established firms and indicates why analysts have such a negative view of the firm. Tesla's business model is so different that fitting Tesla's processes into a traditional automotive forecasting model will produce erroneous outputs.

We design, develop, manufacture and sell high-performance fully electric vehicles and energy storage products. We have established our own network of vehicle sales and service centers and Supercharger stations globally to accelerate the widespread adoption of electric vehicles. Our vehicles, electric vehicle engineering expertise, and business model differentiates us from incumbent automobile manufacturers.

This last phrase I highlighted is key. Tesla is different and should not be viewed in the same light as incumbent firms.

Analyst Ratings

Check out the comparisons of analyst opinions for Tesla and its main competitors GM and Ford. There is a full 180-degree difference with these two companies and Tesla. The reasons should now be very obvious based on the above analysis.

(Source: WallStreet Journal GM, F, TSLA)

Conclusion

The moral of the story is that consumers are accepting this new technology while analysts are late to the party. So, follow customers, not analysts. Customers make or break the company. Remember, analysts' opinions don't move the market. In fact, I firmly believe they are there for entertainment purposes only. They don't understand the industry dynamics until its too late. Remember the hate on Amazon? Only in 2015 did it appear that analysts became bullish. However, if you'd followed the customer, you'd know of a potential game changer way before. Follow consumers while investing in Tesla stock.

Looking to invest in auto sector? Here are Amigobulls' latest Top Auto Stock Picks which have outperformed the market.


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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and TSLA stock

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FraFacca
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This is a very interesting article. I agree with it in principle and agree that analyst expectations is often off the mark, particularly so with disruptive stocks. However, one should notice that Ford has a P/E of 10.3 and a market cap of 50 Bn, GM has P/E of 4.2 and a market cap of 55bn while Tesla, operating at a loss has a market cap of 40Bn.

Which brings to the point that the valuation of disruptive companies is often based on earnings that are further out into the future than established businesses. Therefore, their success is, rightfully, discounted by the risks and uncertainties that are implied in the period to profitability. Maybe Tesla will, in 2018 sell 500,000 cars, making a top line of 20ish Billions, GM for reference has ha topline of 160Bn. Sure, maybe in 2025 they will sell 10,000,000 cars, make 3-4 times GM and rule the world, I for one sure hope so, but you can't really blame the analyst for pricing in the risk that that will not happen.
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