Apple, Tesla trigger Wall Street dreams of $3 trillion valuation
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The blockbuster targets come as shares of both companies -- though two of the most popular in the S&P 500 index -- have slumped this year and are lagging the benchmark’s 4.9% rise. That hasn’t dented the enthusiasm of a handful of analysts and investors betting big on the future of driver-less cars.
Cathie Wood’s Ark Investment Management, for example, sees a 50% chance of Tesla achieving fully autonomous driving within five years, while Citigroup Inc.’s Jim Suva said developing the Apple Car could boost the company’s sales by up to 15% after 2024.
“Tesla is the perfect example of a momentum stock that is really all about the optimism of the future and optimism of what they can do with everything that they are working on," said Greg Taylor, chief investment officer at Purpose Investments. “And conversely Apple has almost become the new defensive stock. It’s the company with one of the best balance sheets out there. And it’s become almost the new defensive that when people buy the market, they buy Apple."
Wood was the latest to predict that Tesla would reach the eye-popping milestone after she boosted her share price forecast to $3,000, giving the company a valuation of almost $3 trillion. That follows New Street analyst Pierre Ferragu, who forecast the electric-vehicle maker can have a market capitalization of $2.3 trillion to $3.3 trillion by 2030.
Shares of Tesla rose 2.3% to $670 on Monday, giving it a market value of about $643 billion.
“A $3 trillion market cap has to be a function of both the promise of a technology and some very tangible proof that it’s economic model is profitable, and deeply profitable," said Nicholas Colas, co-founder of DataTrek Research. “So you don’t get to $1 trillion, let alone $3 trillion by just talking. You get there by showing the numbers, by showing the profitability."
And while Apple has a solid track record of strong profit generation, Tesla is still in the early stages of that.
“Tesla has yet to prove remarkable profitability. And it doesn’t exactly operate in a sector that has remarkable profitability. I understand why it has the valuation it has today -- breaking through on EVs and making them a mass market concept is worth this valuation. However, getting a triple out of it, requires, that you then show that that business model is profitable," Colas added.
Citigroup and Wedbush see potential for Apple to hit the $3 trillion target, an increase of about $1 trillion from its current market capitalization. Apple is already the most valuable stock in the world.
Apple is down 7% this year and Tesla has slipped about 5%, pushing it further away from the recent bull calls. Analysts covering Apple expect the stock to rally about 23% this year on average, with 32 of them posting buy ratings, 10 with holds and three suggest selling the shares. Those that report on Tesla forecast a further 5.3% decline, with 15 of them having buy recommendations, 14 with holds and 12 with sell ratings. Both stocks make up a total of more than 7% of the S&P 500 Index.
Part of the decline for these high-flyers is a general rotation by investors out of growth and momentum stocks and into the value trade this year as optimism about economic growth and concern about inflation fueled a selloff in bonds. The Nasdaq 100 Index, where both these stocks are listed, has wiped out this year’s gains twice within a matter of two weeks. The index is now up 1.5% for 2021.
“It’s hard to discount anything right with the amount of money printing that’s going on. I think it all comes back to just how much money is in the system. As long as money keeps being printed at the rate that it has been, then it’s going to be put into risk assets in the equity market," Taylor said.