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Wedbush: Tesla Stock Has Double-Digit Upside, But Don't Buy TSLA

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Dan Burrows, Contributing Writer
·4 min read
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Tesla (TSLA, $845.00) stock has the potential to reach $950 per share, says Wedbush analyst Daniel Ives.

But he still doesn’t think you should buy it.

Tesla shares jumped at Friday’s opening but soon cooled off, perhaps influenced by Ives slapping a Street-high price target on TSLA stock without raising his recommendation.

Ives hiked his 12-month target price, from $715 per share to $950, to better reflect the electric vehicle (EV) maker's surging deliveries in China. At the same time, however, Ives stood pat on his Neutral rating, which is essentially the same as a Hold call.

The lack of an upgrade despite a PT implying double-digit upside might have caused some confusion for TSLA investors, so let's unpack it.

The Bull Case for Tesla Stock

First, have a look at the key thinking behind Ives' new price target.

"The hearts and lungs of the Tesla bull thesis is centered around China as we have seen consumer demand skyrocket into 2021," Ives wrote in his report to clients. "We believe that the China growth story is worth at least $100 per share in a bull case to Tesla as this EV penetration is set to ramp significantly over the next 12 to 18 months, along with major battery innovations coming out of Giga 3."

(Giga 3 refers to Tesla Giga Shanghai in China. Also known as Gigafactory 3, this is where finally assembly of the Tesla Model 3 takes place.)

The bottom line is Ives' raised his target on Tesla stock "to reflect a stronger EV demand forecast going forward." The analyst also lifted his "bull case" price target to $1,250 from $1,000, which is what to expect in a sort of best-case scenario.

So Why Is TSLA Stock Not a Buy?

Here's why it's not weird that Ives didn't raise his call from Neutral to Outperform: A target price of $950 gives TSLA upside of about 13%, which isn't a big deal after considering what that actually means.

Different equity researchers mean different things when they say Hold or Neutral or Market Perform, what have you. At many shops, recommendations are benchmarked against the S&P 500. A Buy call means the analyst expects the stock to outperform the benchmark index over some period of time, usually around 12 months. A Hold call reflects the expectation that the stock will perform in line with the S&P 500, while a Sell call projects the stock will lag the index.

You get the idea.

Wedbush's recommendations are a bit different. Rather than benchmark to the S&P 500, it employs the other stocks in the analysts' research universe as the benchmark.

"Expect the total return of the stock to perform in-line with the median total return of the analyst's (or the analyst's team) coverage universe over the next 6-12 months," says Wedbush. Ives covers more than 30 companies, including Apple (AAPL), Microsoft (MSFT) and Salesforce.com (CRM).

Furthermore, Wedbush's Neutral recommendation is also firmly in the mainstream when considering what the rest of the Street thinks. Of the 37 analysts covering TSLA stock tracked by S&P Global Market Intelligence, seven rate it at Strong Buy, four say Buy, 14 rank it at Hold, five call it a Sell and three say Strong Sell. The remaining four analysts have no recommendation on the stock.

Put it all together, and Tesla shares earn a consensus recommendation of Hold, according to S&P Global Market Intelligence.

Lastly, TSLA is up about 685% over the past 52 weeks. You can't fault anyone for being cautious about chasing a stock after a run of that magnitude.

TSLA stock chart
TSLA stock chart

You can be bullish on a name and still not love it at current levels. All stocks rise and fall regularly and randomly, and Tesla stock itself happens to be exceptionally volatile. Waiting for a better entry point is a perfectly reasonable argument to make.