Bulls And Bears Debate Whether Tesla Is A 'Screaming Buy' Or A Bellwether For Zombie Stocks

Tesla held a special investor day last week to unveil its "master plan" - including how the company plans to scale up amid increased competition - which all eyes were on.

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There was also a discussion on how the electric vehicle giant can improve its market share in China, where it's competing against a large number of Chinese manufacturers of electric vehicles.

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The shares of the company plunged 7% after the event, as critics criticized that there wasn't enough information provided by the company. FactSet reports that Tesla's stock closed Monday at $193.81, a 49.2% drop from its 52-week high, while its peers' stock dropped an average of 18% during the same period.

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With a series of aggressive discounts in recent months, the company seems determined to stoke consumer demand, as it has continued to slash prices on its models in order to stimulate consumer demand. Musk said in January that Tesla was experiencing a surge in orders that were near twice the rate of production as a result of the move. This certainly seems to have sparked demand for the vehicle.

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Tesla shares have been up around 57% so far this year, but analysts are divided when it comes to the company's prospects in the future.

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Here are the bulls' and bears' thoughts on the world's largest manufacturer of electric vehicles.

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The bears: ‘Bellwether’ for zombie stocks

Besides the recent price cut, Tesla has hinted that it will offer a low-cost next-generation model for under $25,000 in the near future. A Tesla Model 3 sedan begins at around $43,000, which is currently the lowest-priced Tesla model available in the market today.

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Tesla would sell a lot of cars if it introduced a lower-cost model, according to portfolio manager Paul Meeks of Independent Solutions Wealth Management.

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“A big question is how much will this cost in terms of profits and cash flow. The stock could really come down if we get this company to a mere mortal auto profitability level," he told Trade Algo on Thursday.

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It is clear from his comments that Tesla is currently trading at about 10 or 11 times the market value of General Motors, and that it remains "extraordinarily expensive," trading at about 50 times the earnings for this year.

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“Even though the price is down 50% from its high, it is still awfully expensive to buy at the moment,” he said.

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Many Tesla bears complain that the company's valuation is too high, and it is a common complaint among them.

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There are concerns that the stock price may have reached nosebleed levels because the cash flow expectations baked into its stock price appear to be unreasonably optimistic, according to David Trainer, CEO of investment research firm New Constructs.

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“Even though Tesla (TSLA) is not a zombie stock because of Elon Musk’s ability to raise a large amount of capital, the stock still serves as a bellwether for the entire cohort of zombie stocks, as it shares many of the characteristics that are common to zombie stocks, such as an outrageous valuation and high cash burn,” he outlined in notes sent to Trade Algo. “It is a fact that zombie companies make enough money to pay their debts, but not enough to pay the interest on them.”

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Trainer believes that Tesla was a major contributor to the emergence of today's zombie stocks due to its unrelenting rise in share price over the past three years, where investors ignored the company's fundamentals completely.

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Bull case: ‘A screaming buy’

“If you compare Tesla with some of the very large tech companies in the U.S., you will find that it is "growing earnings probably two to three times faster than ever before and it's cheaper," George Gianarikas, an analyst at Canaccord Genuity Capital Markets, told Trade Algo on Friday.

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“It seems to me that you should look at this stock based on its price-to-earnings ratio. If you look at the relative growth of the company compared to large-cap tech companies, you can see it's a screaming buy," he said.

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Furthermore, Gianarikas says that Tesla's planned entry-level vehicle appears to be a significant step forward in terms of price.

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“Tesla will be able to leverage its cost leadership not only to accelerate EV adoption and maintain its industry-leading margins but also to accelerate the world's transition to sustainable energy through the adoption of EVs,” he said in remarks sent to Trade Algo.

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Goldman Sachs' Mark Delaney, who had rated the stock as buy in the wake of the investor day, kept his buy rating on the stock.

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“As a matter of fact, we believe this event will increase investor confidence in Tesla’s ability to reduce costs by up to 50% with the launch of its next-generation platform, as the company's broad and deep teams and its vertically integrated model enable it to optimize both on cost and performance criteria,” said Mr. McKinney.