JMP Starts Tesla At 'Market Perform,' Says Valuation Premium Is Fair

• Tesla Motors Inc TSLA shares have lost 13 percent in the last three months, even after hitting a high of $264 on September 21.
• JMP Securities’ Alex Gauna initiated coverage of the company with a Market Perform rating.
• Although Tesla is uniquely differentiated, it faces a highly competitive landscape and its shares appear fairly valued, Gauna stated.

Analyst Alex Gauna wrote, “Tesla is a disruptive new entrant to the automotive and energy storage markets that is boldly setting higher new standards in the areas of zero emission transportation, driving performance, battery manufacturing, and quality.”

Gauna believes that Tesla is “uniquely differentiated,” since it has been very quick with its innovations, is willing to take risks, and has the capacity to execute. He added, however, that the company faces a highly competitive automotive market, is witnessing an environment of evolving regulatory and liability risks, and has the disadvantage of a relatively high cost structure.

The analyst enumerated the investment positives for Tesla as:

1. A differentiated approach to zero emission vehicles, battery production, and autonomous driving
2. A huge addressable market opportunity in automotive and energy storage, and the company has only just begun to penetrate this
3. Accelerating sales trends on the introduction of the Model X and Autopilot functionality
4. First mover advantages with a solid track record of innovation, customer satisfaction, and quality
5. The company’s attractiveness as a potential acquisition target for other technology giants aiming to enter transportation or energy

Tesla’s shares have traded broadly flat year-to-date, having lost 2 percent, versus a similar decline in the S&P YTD. The company’s stock performance has been driven by valuation considerations, a modest miss of annual vehicle targets, and intensifying competition.

“We are initiating coverage with a Market Perform rating based on our view that its current trading level of ~3x FY17 EV/Sales represent an appropriate premium to peers and our coverage mean; thus, we feel shares are fairly valued at current levels,” Gauna added.