The Psychology Roiling Tesla's Stock Price

A month ago, Tesla’s closing stock price peaked at $383.45, and last week the stock closed below $330.

Tesla Inc. Powerpacks and inverters stand at the Southern California Edison Co. Mira Loma energy storage system facility in Ontario, California, U.S., on Thursday, June 1, 2017. The Mira Loma substation houses nearly 400 Tesla Powerpack units, in an effort to operate to state regulations on producing clean energy electricity. Photographer: Patrick T. Fallon/Bloomberg

Apparently, investors are beginning to catch on to the fact the Tesla CEO Elon Musk has a severe case of a behavioral condition known as “the planning fallacy.” People who suffer from the planning fallacy are serial offenders when it comes to projects coming in over budget, late, and with fewer features than promised. The New York Times reported that Telsa's main problematic issues pertain to a slower timetable than expected for the introduction of the Model 3, along with problems that relate to the manufacture of its battery packs.

After a sharp runup in Tesla stock during the first half of this year, sell side analysts have sharp disagreements about Telsa’s stock valuation. The range of price targets is incredibly wide, from $155 to $464. The stock closed at about $328 last week. If you have a view about whether or not Tesla’s stock is mispriced, and are looking to exhibit confirmation bias by finding a security analyst whose report will support your view, then you have a rich menu from which to choose.

That is like having a rich junk food menu in front of you when you have a weakness for junk food.

The wide range of analysts’ price targets is made possible because Tesla is a high sentiment beta stock. Returns to high sentiment beta stocks are very sensitive to overall sentiment in the market. High beta stocks are typically the stocks of young companies that are not yet profitable, are potentially very profitable in the future, and which feature great uncertainty. These stocks are typically difficult to value and difficult to arbitrage when mispriced. That is why analysts’ price targets for high sentiment beta stocks are akin to junk food, lacking much in the way of nutritional value.

The average (or mean) analyst price target for Tesla is about $303. Given Tesla’s closing price of $328 last week, the mean forecast is for a negative return, almost -8 percent. Among the analysts with above average price targets is Guggenheim, whose price target is $380, corresponding to a return of 15.7 percent. Among the analysts having price targets moderately below average is Morgan Stanley, whose price target is $305, corresponding to a return of -7.1 percent. Among the analysts having price targets near the bottom of the range is Barclays, whose price target is $165, corresponding to a return of -49.8 percent.

Guggenheim, Morgan Stanley, and Barclays all forecast Tesla’s future free cash flows. Free cash flows are primary inputs into the computation of the intrinsic value of a stock. Not surprisingly, Guggenheim’s free cash flow forecasts are more optimistic than Morgan Stanley’s forecasts. However, Guggenheim’s forecast is only for the period ending in 2020, while Morgan Stanley’s forecasts are for 2030 and beyond. Moreover, Guggenheim relies on a forecast of future P/E for its price target, in their case a P/E of 19. For its price target, Morgan Stanley relies much more heavily on discounted free cash flows. As for Barclays' price target, the firm's analysts employ a weighted probability P/E analysis, using an implicit P/E of 11.