Morgan Stanley’s latest stock price target for Tesla (NASDAQ:TSLA) is $650. Based on the recent high of over $1,000 per share, it would mean the stock is overvalued by over 35%.
The Wall Street firm argues that, at $1,000 per share, investors are ignoring various dangers associated with Tesla, including execution risks:
…one must also take into account many of Tesla’s business objectives face a degree of execution risk that may be significantly higher than many of the more proven/ mature companies…
That’s not the only rationale making the stock look incredibly pricey, though. Here are three additional reasons why Tesla’s stock could decline further.
Tesla produced its millionth car just three months ago. The company has little experience manufacturing on a large scale compared to legacy automakers.
But as Tesla expands and increases production, quality issues are cropping up with the Model Y crossover being the latest example. For instance, reports surfaced last week, indicating that Tesla’s newest car has significant defects. The car’s quality issues range from loose seatbelts to paint and trim problems.
The 2020 Influential J.D. Power quality survey released Wednesday has further dented Tesla’s reputation. The study, which measures vehicle quality during the first three months of ownership, ranked Tesla at the bottom among 33 brands.
During the first 90 days of ownership, Tesla vehicles experienced 250 problems per 100 cars. The survey’s industry average was 166 problems per 100 vehicles.
One of the arguments regularly presented to support Tesla’s high stock price is that the automaker should be viewed as a high-growth tech company.
But its business model and capital expenditures are different from those of tech giants. Tesla’s revenues mainly come from selling cars–a highly competitive business in the consumer discretionary segment.
The electric carmaker’s gross margins also compare poorly with high-growth tech stocks such as Apple (NASDAQ:AAPL). Tesla’s gross margins in 2019 were about 17%. This is lower than Apple’s gross margins last year (38%).
The argument could be made that Tesla will build out services and subscription platforms eventually. But as the successful platforms have shown, it’s the scale and reach that makes all the difference.
In the case of Apple, for instance, the iPhone-maker had over 1.4 billion active devices as of early 2019.
In the highly competitive auto sector, this is a model that is yet to be proven. And even if Tesla does succeed, it is unlikely to be on the scale of the high-growth tech companies.
Tesla is, for instance, planning to offer Full Self-Driving functionality as a subscription service. But for $7,000, the number of takers is likely to be limited.
The majority of Wall Street analysts agree that Tesla is overvalued. Out of the 33 analysts covering the stock, only eight are recommending investors to buy.
The consensus rating is ‘Hold,’ with the average price target being about $715.
While analysts are sometimes wrong, it would be foolhardy to ignore their influence. For any investor looking to ride the electric car revolution, there’s a good chance Tesla’s stock will be cheaper in the not-too-distant future.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned companies.