It didn’t surprise me that Tesla Motors Inc (NASDAQ:TSLA)‘s share price largely bounced back the next day (and it continues to recover), for two reasons:
The market often over-reacts
Tesla’s stock price drop on what was actually an upping of Goldman’s target price, even if it was (and is) lower than the current price, seems further evidence that many react to headlines without digging deeper.
Part of the reason the stock bounced back the next day was likely because some dug further.
Tesla is a Super Ball stock
Tesla Motors Inc (NASDAQ:TSLA)’s stock has behaved like Wham-O’s iconic Super Ball, quickly springing back after each drop. And while short-covering has surely been a reason for part of Tesla Motors Inc (NASDAQ:TSLA)‘s out-sized upward moves after positive news has been announced, attributing this bounce-back to short-covering would be a Slinky-like stretch.
Tesla, unlike many extremely highly-valued (call it “over-valued,” if you wish) stocks, has a low beta — 0.54, per Yahoo! Finance. That means its volatility, in terms of stock price fluctuation, is only about half that of the overall market.
Why so low a beta? There’s little doubt the high insider-ownership is a major factor. Additionally, it’s likely there’s a core of shareholders with strong convictions.
Just because the stock’s been akin to a Super Ball doesn’t mean it will keep its bounce. It could morph into Wham-O’s Hackey-Sack at any time. However, it seems a positive sign.
The Godman — umm, Goldman — Valuation
Goldman Sachs Group, Inc. (NYSE:GS)’s business acumen shouldn’t be underestimated. However, as my kidding title suggests — just because one analyst at Goldman (or anywhere) says something is so doesn’t mean it’s so.
Further, it’s not enough to know Goldman’s price valuation is $84 per share. It’s important to understand how that number was derived.
Goldman arrived at the $84 by averaging valuations representing three scenarios: optimistic, pessimistic, and one in between. So, if one of the poles (optimistic or pessimistic) turns out to be close to what happens, that means the current valuation is considerably off.
The numbers:
| Scenario | Total Vehicle Sales (Model S/Next Gen) | Operating Margin | PE | Current Valuation |
| Pessimistic | 105,000 (50K/55K) | 14.6% | 20 | $58 |
| Mid-Case | 150,000 | 14.8% | 20 | $83 |
| Optimistic | 200,000 | 15.2% | 20 | $113 |
| AVG | — | — | — | $84 |
Source: Numbers from Goldman memo
Goldman Sachs Group, Inc. (NYSE:GS) previous price target was in the $60s, so it was actually raised. Goldman kept its stance on the stock — neutral.So, we have a neutral stance with a difference of nearly 100% between the optimistic and pessimistic sales projections. In other words, Goldman doesn’t have much of feel for what will happen in three years! This is understandable, given the lack of historical sales data.
Here’s how Goldman Sachs Group, Inc. (NYSE:GS) arrived at the optimistic sales figure of 200,000:
We then look at a bull case where we assume that TSLA will be able to get approximately 3.5% global market share in the entry lux and mid-lux category suggesting total volumes of 200K units. The 3.5% market share assumption is consistent with the typical 3-5 year share gains seen by the most successful industry players across multiple luxury sub-segments over the past decade.
