Even at $1T, Tesla's value still likely to climb, Piper Sandler analyst says

As the value of Tesla Inc. shot past the $1 trillion level earlier this week, the Minnesota financial analyst who showed early this year how that might happen knew investors would have one question for him: Can its shares keep rising?

No doubt, he said, while adding that investing in Tesla requires a stomach for volatility.

"The stock has done well but I don't think they've run out of things to work on," Alexander Potter, auto industry analyst at Minneapolis-based Piper Sandler Cos., said in an interview.

With a 100+-page report in January, Potter became the first analyst at a major investment bank to try to show why Tesla could join companies like Apple, Microsoft and Amazon with a valuation of $1 trillion. At the time, Tesla was worth about $800 billion.

Last week, Tesla shares surged past $900 billion for the first time after the company's third-quarter results showed how it defied the supply constraints that have hurt production and sales at other carmakers.

On Monday, Hertz announced it would purchase 100,000 EVs from Tesla in the next year or so, news that sent Tesla shares up 12.6% to $1,024 and lifted the company's overall valuation above $1 trillion. Over the entire week, Tesla shares rose 22%.

On Wednesday, Potter raised his one-year target price for Tesla shares to $1,300 from $1,200 and published an updated analysis.

Even as Tesla's electric vehicles face more direct competition than ever from legacy automakers, its cars remain far and away the most popular EVs, Potter wrote. It has gained market share and been able to raise prices, boosting its profit margins. Quality improved, with warranty expenses falling as a percentage of sales, he noted.

Tesla's revenue will be about $53 billion this year, Potter forecasts, up from $32 billion last year. He expects its revenue to surpass $80 billion in 2022. In 2025, he expects Tesla to be close to, or even surpass, auto industry leader Toyota in revenue.

But he also said that Tesla shares are likely to remain volatile and could swing downward sharply. "There's any number of downside risks," Potter said, citing prospective regulatory moves by countries or an "irresponsible" tweet by Tesla Chief Executive Elon Musk.

In the interview, Potter said he has raised his previous assumptions about the company's ability to build its market share based on the growing consumer recognition of the value that electric vehicles yield.

Tesla's website shows that orders placed now for the entry-level versions of its Model 3 sedan and Model Y SUV will be delivered next summer. The company has raised prices across its product line all year long and order wait times have only gotten longer.

"Generally speaking, regardless of what vehicle you're going to put in a head-to-head bake-off against a Tesla, Tesla typically wins, regardless of the brand, regardless of the drivetrain, regardless of the price even," Potter said. "And I don't see any reason why that should change."

Two years ago at this time, Tesla shares were valued around $70. The stock broke out in 2020 as investors began to realize both the enormity of the gas-to-electric change in the auto market and the company's potential to disrupt the energy industry and others.

In setting a target price of $1,300 for Tesla shares, Potter assigns only about $400 of that value to the money it makes directly from cars. He assigns about $650 in value to the self-driving software in its cars, which is hugely profitable to the company and that he expects other manufacturers will license.

The rest he assigns to Tesla's still relatively small forays into things like solar energy and insurance. He noted that people speculate about businesses, such as artificial intelligence services, Tesla may enter that are beyond the scope of analysts and investors to meaningfully value now.

"A lot of people naturally see the performance of Tesla stock, the trillion-dollar market cap and they want to understand what is implied by the valuation," Potter said. "What kind of share does Tesla need in the auto market for that to be justifiable? And they think they missed it. But if they thought about things three years, five years, 10 years from now, the entire world, not just the auto industry, looks fundamentally different because of things Tesla is doing right now."