Bank of America Has 300,000 Reasons to Doubt Tesla

Bank of America issued an extremely negative note Monday morning on Tesla Motors TSLA as the stock made a new all-time high in the pre-market. Bank of America is the latest voice against the stock in recent times and yet the stock still continues to climb rapidly.

300 Thousand Reasons to Doubt Tesla

The analyst team at Bank of America led by John Lovallo II and John Murphy noted Monday morning that the current valuation of Tesla's stock, at $120 per share, implies that Tesla will sell more than 321 thousand vehicles per year by 2020. They find one problem with this number though... they only forecast sales of about 21 thousand vehicles in 2020 and note that the current valuation implies a 48 percent cumulative annual growth rate (CAGR).

"We estimate that a $120 share price implies over 321K vehicle sales in 2020, which is a full 300K units higher than our current 2013e and would represent a 7-year CAGR of 48%. We also note that this analysis assumes TSLA can achieve EBIT margins of about 12.5% in 2020, which would be over 380bps better than the 2012 average of BMW, Mercedes, Audi, Bentley, and Porsche and 400bps better than our European analyst's forecasts for this group in 2015."

"While nothing is impossible, particularly with Elon Musk at the helm, we believe these assumptions warrant a healthy degree of skepticism."

Peak Sales Growth

Looking at over 130 historical data series for vehicles classified as luxury by Ward's Auto, Bank of America notes that sales begin to level off, on average, within 8 quarters of a vehicles launch. Therefore, sales growth would max out in about a year and then begin to decline. In order for the 48 percent CAGR to be realized, sales growth would need to accelerate through 2020, not decelerate.

"Our current forecasts (extrapolated to 2020), discounted at an estimated weighted average cost of capital (WACC) of approximately 11%, indicate a $39 stock price for Tesla, consistent with our price objective," wrote the analysts. The base case scenario assumes that Tesla sells 61,020 vehicles in 2020, a CAGR of 16 percent in volume.

Even in a rosier scenario assuming that volumes double the base case and assuming that margins are maintained at these higher volumes, they still only see the price for Tesla's stock at $73.01 here. "In this scenario, our proforma 2020 forecasts, discounted at an estimated weighted average cost of capital of approximately 11%, indicate a $73 stock price for Tesla."

Lastly, they try to justify the $120 price on Tesla's stock in a third analysis. "The third analysis shown below assumes Tesla can achieve twice our current Model S and Model X volume forecasts and 17X our Gen 3 forecasts each year through 2020, while maintaining our base margin assumptions. Essentially, this forecast assumes EVs become much more prevalent by 2020 and that Tesla gains dominant market share, driven by the planned mass market Gen 3 vehicle launch around 2017."

"In our view, these volume forecasts are extremely aggressive, unlikely to materialize, and equate to over 5X our current aggregate 2020e unit sales. Furthermore, a mass market EV from Tesla would almost by definition carry lower EBIT margin potential than the Model S or X, similar to a BMW 3 Series versus a 7 Series. Notwithstanding, we believe Tesla would need to sell twice our Model S and Model X forecasts and 17X our Gen 3 forecasts, without sacrificing margins, to justify the current market price of approximately $120/share."

Time To Short

The only problem with Tesla's stock is that it is already so heavily shorted that the stock is primed for short squeezes to the moon. According to yahoo finance, nearly 32 percent of the floating stock is shorted, meaning that valuations really don't matter here. After all, many stocks have been overvalued to only become more overvalued before eventually crashing. Something to look for would be to watch to see the short interest percentage drop below 10 percent before shorting, eliminating the risk of a massive squeeze.

This may not give an exact price as to where to short but momentum stocks like Tesla are very tough to call tops in. Thus, watch the short interest and the option market as well as technicals; technicians will be watching for a top formation to short at but might have very small stop-losses in place which could also spark short-covering rallies.