Merrill Lynch Research Sucks Power out of Tesla and Elon Musk

Merrill Lynch Research Sucks Power out of Tesla and Elon Musk

I guess Bank Of America needs to cover their short position.

AmpedRealtor | October 23, 2013

... or they are offering an honest assessment that Tesla stockholders don't like because it may have a negative impact on the current stock price. There is just as much motivation on the part of current stockholders to trash negative articles to protect their position.

This article makes a lot of sense. Read the threads about EU deliveries - Tesla is having problems and the article suggests that EU deliveries are not going as expected. Well, they're not. I didn't find anything unreasonable about this article that would make me believe that it's anything other than an honest look at the stock value compared to Tesla's business realities.

The fact that Tesla's stock gives it a market cap at just less than half of GM is ridiculous. Tesla is not worth half as much as GM - a company that moves millions of cars each year globally. It just isn't. The stock is a bubble.

GDH | October 23, 2013

Did anyone ever think the stock would stay up that high for every long?

NKYTA | October 23, 2013

"The image issue after the Model S battery fire and potential NHTSA probe were brought up."

Were brought up? Well that's definitive. :-/

Mathew98 | October 23, 2013

You guys do realize this is an "upgrade".

"The Merrill Lynch team did downgrade Tesla to Underperform from Neutral back on February 21, 2013. Shares closed at $38.54 the prior day, so the team missed a major move to the upside in Tesla."

Now their target price is $45 so isn't this an upgrade to their previous report?

Yeah, I'm gonna listen to the two John's after they missed a 400% move in 7 months. Perhaps they have better batting average trolling the street walkers...

leon.gelernter | October 23, 2013

Tesla has problems delivering cars to Europe. Ordered buy the end of march-delivery (hopefully-not confirmed) mid/ end february. A 6 month or more is not OK for any car. I love the car and the company. Elon is a great man. But Tesla has to step up the game in order to deliver cars with 2-3 months here in Europe. | October 23, 2013

Agree with @AR but also remember that stock price is about future expectation, not current performance.


Bryan M. | October 23, 2013

TSLA may be a bubble however its potential at this point can't be evaluated based off what other autos are doing or have done in my opinion.

Carefree | October 23, 2013

That Merrill guy is an idiot! He is too stubborn to admit that he was wrong in the first place when he gave that $45 price target. He is married to the traditional car manufacturers and doesn't get why Tesla is different.

Now that the stock took a slight hit he comes out of his rat hole to proclaim that he was wrong all along - what an idiot.

Sorry, but I have been watching the stupidity of that particular analyst for quite some time.

Brian H | October 23, 2013

Now that the federal government is up and running again, it appears that NHTSA is looking at the incident more closely. Though an official investigation has not begun, the agency is gathering information to determine if agency action is warranted.
Bank of America analyst John Lavallo II released a report Wednesday that called Tesla’s shares “vastly overvalued from a fundamental standpoint” amid the potential NHTSA investigation and concerns about Tesla’s ability to win over consumers in Europe.

I think an NHTSA probe will make the car come out looking like a champ.

But it needs to fix the connector and winter tires issues for Europe, stat.

Bubba2000 | October 23, 2013

Tesla will get the European launch right. Norway has been a great success and yes, incentives helped. Germany is toughest market in the Model S price range, with competition from Mercedes, Audi, Porsche. It will force Tesla to improve their cars. Model S will have to shed about 500-1,000 lbs. Battery pack needs to go to 500 KW-hr. Interior needs refinement. Supercharger network needs to be deployed and the charging speed increased.... which a 500 KW-hr battery would help.

Yes, short term the stock is vulnerable, but BEV will disrupt the ICE industry. Just like ICE disrupted the horse buggy.

Gizmotoy | October 23, 2013

@GDH: Did anyone ever think the stock would stay up that high for every long?
Well, there was a post a few days ago from someone who made a new Model S worth of profit, and was holding out on selling until it had gone up another 8x to cover the cost of his house... so yes, there are unrealistic expectations.

@Mathew98: Not exactly. An upgrade would involve a change in recommendation from Underperform. They changed the target price, but continue to predict the stock underperforming. I realize this is confusing, but picture the recommendations come in ranges. The target price may have gone up, but it still falls in the Underperform range, and thus this was not an upgrade.

JZ13 | October 23, 2013

Tesla is a small bubble that will inflate into a HUGE bubble that will not burst becuase earnings will eventually catch up to its market cap. This will take years (maybe 10 - 15) As production capacity grows Tesla will become a farily valued auto manufacturer. Until then there are huge opportunities to profit on that surge. So this BoA noise is just temporary. The John's clearly do not understand that we are at the cusp of a BEV revolution and they obviously have not driven the car.

What is all this hubub about failing to execute in Europe? I have seen no evidence of that. The German publication is just nationalistic pride that is about to get hurt. The deliveries that are a month or two later than originally scheduled are not surprising for an initial product roll-out. The Supercharger roll-out for Germany is actually impressive.

Q3 ER is gonna be a big surprise and guidance for 2014 is going to jack the stock back to the $190's and beyond. Its moments like this that create greaty buying opportunities for those of us that see the big picture and do not get flustered by useless valuation metrics. Those metrics are appropriate for mature companies. They make no sense for extreme-growth stocks like TSLA. Are these same people giving Wal-Mart and Amazon the same P/E?

Lastly, no one is making a big stink about Elon's comment that GenIII prototype will be out in 15 months. That is HUGE news. It validates that GenIII is real and is going to happen very soon. Gen III will take over the world.

Mathew98 | October 23, 2013

This is the same game that Goldman played just before the Q2 earnings release. They managed to drop the price for two days and scooped up some cheap shares before TSLA rebounded sharply for the next two weeks.

Well, I'm gonna have use some of that dry powder to load up. Thanks JnJ, aka Beavis and Butthead!!!

Fredlambert | October 23, 2013

@Mathew98 I agree with you on this one. The timing is very similar.

Captain_Zap | October 23, 2013

@Mathew98 & Fredlambert

It is like Deja Vu'.

michael1800 | October 23, 2013

I'm definitely not against getting in before the Model X rolls out :) Yummy.

Jamon | October 23, 2013

@JZ13 +100
@Matthew98 +1

I took the opportunity to load up on call options today. Just because the investment bankers manipulate the market for their own gains doesn't mean the little guys can't jump in and make their own profits :)

wmg | October 23, 2013

I read the full report.
It's basically up to Tesla to prove them wrong.
I've seen bad reports hundreds of times
Quarterly earnings will tell the story.

edcalis | October 23, 2013

I wish the stock would go down tomorrow a little bit more, so I can buy and buy. :))))

chrispga | October 23, 2013

There seems to be a mission on Wall Street to drive Tesla Stock down. Analysts were hoping the debt ceiling fight would drive shares down so they could invest before congress made a deal to raise it. That tactic has failed so now Bank of America(just found guilty of fraud by U.S Government) attempts to drive stock down.

Bank of America may have ties to OPEC.

Oil Companies need to take aim at Tesla to keep OPEC profits high.

jq5073 | October 23, 2013

@JZ13 -- That's the most ridiculous perspective of the stock market I've ever heard.

Would you have bought MSFT in 1980 for it's share price in 1995 just because "it's a small bubble that will inflate to a huge bubble" ? No, of course not. You invest in 1980 for a reasonable price with the expectation that the current management and direction of the company will take your money and produce ROI better than other options in the market.

MSFT could just as easily have tanked in 1985.

TSLA could just as easily tank in 2015. Why would you pay optimistic 2025 prices for the share in 2013?

tes-s | October 23, 2013

Some people are better EV afficionados than securities analysts.

Bubba2000 | October 23, 2013

My optimistic scenario is that Tesla is producing 700 cars/week based on the 2 month VIN average. Technically they should be able to ramp production to 1000-1200 cars/week with increased automation to material flow, final assembly as well continuous optimizing of the design to facilitate manufacturing.

Excluding the Li-ion batteries, the rest of the supply chain items are commodities. With volume, the suppliers will invest in automation to improve delivery and drive costs down. Panasonic is investing in plant and equipment to supply 1,200 cars/week. Another data point that indicates about Tesla's production goals.

With geographic and supercharger expansion in the US+Canada, Europe, Greater China, Japan, Tesla can sell at the rate of 50,000-60,000 cars/year in 2014. With ASP=90,000+, revenues would be $5.4B. Gross margins of 25% would mean gross profits of $1.35B. Overhead, R&D would chew at least $0.75B. Minimal taxes due to carry forward losses, depreciation, etc. Net profit $0.850B. With Model X in the works and GenIII being developed a PE of 50 would be a minimum with market cap of $42.5B.

Model X sales could match Model S. Look how the Cayenne is the number 1 seller with Porsche... more than 911 or Panamera.

Anyway, since when anybody has made money following analyst recommendations from ML/BAC? Those morons nearly bankrupted the country in 2009.

Kleist | October 23, 2013

@jq5073 - I always believed MSFT went public on 3/13/1986.

carolinagobo | October 23, 2013

Bank of America was found gultymof fraud today, I don't care about them I bet to Tesla long term, 5 to 10 years

church70 | October 23, 2013
RedShift | October 23, 2013

Valuing stock on current fundamentals ignores its potential, and valuing based on potential is a black art no one has mastered.

church70 | October 23, 2013
church70 | October 23, 2013

+1 RedShift

eking | October 24, 2013

I think the hardest nut to crack in this thing is to what extent luxury car buyers will want the Tesla over a luxury ICE or hybrid. The analysts suggest that after the early adopters, the rest of the market will not be as patient with long delivery delays and others suggest that perhaps this market wouldn't be as excited with the interior which lacks some of the refinement of other luxury cars. Tire wear on the 21's seems to me to be a problem for most luxury owners who are not of the type to buy either a Panamera or a P85. (Of course there is a Tesla for them too and it has 19" wheels). Question for this market seems to me to be: Are these people going to opt in to the luxury EV market or stick with luxury ICE or hybrids? The analysts are betting against the type of move over to Tesla that the current stock price would need in order to reflect reality. They are probably right. I don't think TSLA is really worth $170/share. I also don't think it is worth $50/share. I'd buy at $95-$100. Even under their overly pessimistic valuation of $45/share that is still double the value of what it was trading at in 2010. So for early buyers that didn't sell, they are doing well regardless.

Car t man | October 24, 2013

By the time early adopers are covered, Tesla should already solve the main issues and also have a solid chunk of charging infrastructure installed, with
a long line of happy users/ambassadors for the brand doing avid promotions for them. That is, if they receive feedback and criticism in a constructive manner, without some of the overly emotional protection on behalf of some.

They will be OK. The complex systems are already working and are being ironed out. The rest is fine tuning.

J.T. | October 24, 2013

Some people underestimate the quality of the buying experience with a Tesla. It's been said many times but most people HATE shopping for a new car. The Tesla model will appeal to a great many people.

Also, let's not forget Tesla hasn't run one ad, anywhere.

I don't see why the others can't have a commercial with a guy who has ED drive a BMW to TGIF order a Budweiser and pay with a Capital One card. Maybe a 60 minute foorball game wouldn't take 3 hours then.

Mathew98 | October 24, 2013

Looks like Merrill did me a favor after all...

Thank you ma'am, may I have another?

Tiebreaker | October 24, 2013

TSLA 174.21
+9.71 (5.90%)
Real-time: 3:22PM EDT

Sudre_ | October 24, 2013

Looks like they are 2 for 2 with their bad information.

eking | October 24, 2013 I agree with most of your post but I disagree that Tesla is easier for people to buy if they live in a state like mine, where it is illegal to buy them here. In Texas, there are a lot of hoops to go through. For me personally, I loved the challenge and I loved working toward the goal. When I got the car, it felt like a huge reward for a not-easy process. But until it gets easy to buy a Tesla everywhere there will be wealthy buyers in a state like this who will opt for the "ease" of buying an ICE car. I mean I read in a couple of different books on car-buying that most luxury buyers are the worst at negotiating prices anyway. They will walk into a BMW dealership and pay sticker. I know of people here who paid over MSRP for this year's Range Rover. So for them, it's not hard to buy an ICE because they aren't actually haggling anyway. Here is an interesting article that came out a day or two ago about the craziness of Texas law when it comes to the process of acquiring a Tesla. It's a shame that is so hard to do it here b/c there are a lot of wealthy Texans who can easily afford one. Or two. Or three. :))

just an allusion | October 24, 2013

I find it interesting that BOFA would undermine a vested interest of theirs when they're in something of a financial quagmire with the recent SEC rulings and the upcoming rulings/fines to be assessed in favor of Fannie and Freddy on the whole mortgage-loan kerfuffle.

Brian H | October 24, 2013

Try substituting "premium" for "luxury" in your car and buyer descriptions. There're a lot of customers out there who have never considered an MB who will spring for an MS.

JZ13 | October 24, 2013

@jq5073 - You misunderstood my point. I don't think TSLA is worth $170 in 2020, I think TSLA is > $1,000 by then and so todays $170 is merely the path to get there. If you want to attempt to value TSLA let's do a quick DCF for 2015:

Model S sales: 65,000 units at ASP of $90k at 25% margin
Model X sales: 35,000 units at ASP of $95k at 25% margin
Development income: $10m
ZEV credit income: $50m
Total revenue: $2.46B
SG&A: $300m
R/D: $350m
Tax rate: 14%
Net income: $1.419B
Shares outstanding: 120m
EPS: $11.83
P/E: 60 (in anticipation of Gen III platform coming)
Tesla share price: $707

So by metrics meant to value mature companies todays $170 TSLA price seems in bubble territory. But that is the wrong metric to use for an extreme growth stock. Therefore, Tesla will grow into its valuation over time. Far beyond 2015

jk2014 | October 24, 2013

Here are a few questions to measure current value... d

Do you see Tesla achieving max production output from the Fremont factory in 5 years? Do you see Tesla opening another factory in 5-7 years? Do you see Tesla Motors failing to increase market share (sales) significantly in the next 5, 10, 20 years? Do you see GenIII as selling out at max production in 4 - 5 years? Do you see further vehicle development after GenIII (i.e. truck, sports car, etc...)?

If the answer is yes to all these questions, then it is easy to see why investors buying now and holding onto the stock regardless of current value.

Also have to consider Elon and other major share holders are not going to sell for a very long time. Not sure, but think Elon et al own close to 35-40% of all common stock. With growing investor demand and limited supply of stock available, stock price would naturally hold high. How many CEOs out there today "will be the last" to sell their company stock? Not one. This, to me, has a large impact on valuation as well. Same goes for Solarcity. I think Elon owns 30% of it as well.

Brian H | October 24, 2013

This very thorough rebuttal of your opinions: says "Far from being overvalued TSLA we believe TSLA is currently trading safely below 50% of fair valuation". IOW, TSLA is worth at least $340. Right now.

James- | October 24, 2013

Darn - I keep missing the stock price dips. I will just have to enjoy driving the car.

Re Tesla being half the price of GM - great. This is how stocks are meant to work. Tesla shows enormous promise as it is delivering a disruptive product ahead of everyone else.

ICEs have been on borrowed time since the day they were first invented, like the steam engine, gaslight, incandescent lights, CRTs, semaphore and so on. We are now at the beginning of the end for a technology that has been incredibly important and there are a significant number of heavily invested users (ICE car owners, me included) and all the related vendors. But change it will, it has to, we cannot keep burning fossil fuels indefinitely - it is beyond obvious.

Back to value - what is the value of the global transportation industry? As much as or more than the global communication industry. It is hard to say as both generate incredible value but I mention it as a benchmark for value.

If Tesla is disruptive in terms of transitioning the transportation market from a finite energy resource to a near infinite energy resource then presumably being worth half GM is a very significant undervaluation.

So the question is whether the incumbents (dare I say the dinosaurs) can go electric fast enough. So far they are not looking very fleet of foot, they never have been and maybe it is simply not structurally possible for them to be so. So the value is in the company that can do the new things.

Any $ value is pure speculation - presumably being heavily invested in horse drawn carriages 100 years ago was not a great position to be in, back then I would have wanted stock in the new motor companies.

JZ13 | October 24, 2013

@Brian - I agree with you. I am not claiming that $170 is the right price for today. I'm merely stating that TSLA is not overvalued at $170. That article is brilliant. I am a buyer of TSLA today because I believe TSLA will surge from this price range. I believe TSLA is undervalued today.

Brian H | October 25, 2013

Sorry, misread.
Here's an earlier article of his from last May he wrote (and got him banned from Seeking Alpha as a result of the subsequent discussion, IIRC):

RZitrin1 | October 25, 2013

ML has been doing negative reports and estimates on Tesla from Day 1. I know because I got the bulletin from my ML broker, which I thankfully ignored.

eking | October 25, 2013

@James most electricity is made thru the burning of fossil fuels. There isn't enough wind here (ie it isn't windy enough) to make the country sustainable on wind power. Best case scenario maybe 25%, and a lot of green energy developers think even that's a stretch. And solar technology for power plants is still too expensive. But in the main I agree that electric cars will become more prominent over time.

Amped | October 25, 2013

I wish Elon would stop stating that it's higher than we deserve.

772 | October 25, 2013

surprised they're still employed...

Captain_Zap | October 25, 2013


Poor reporting. The statement was taken out of context, unfortunately.