Tesla’s earnings announcement Wednesday drew mixed reactions from Wall Street’s analysts after the company reported solid revenue and earnings numbers, but disappointed investors with lacklustre vehicle deliveries projections.
While some analysts were bullish and others were bearish, Barclay’s Brian Johnson was simultaneously neutral and gloomy in his head-scratcher of a call.
Johnson rated Tesla as “Equal Weight”, a neutral rating that is neither buy nor sell. His target for the stock price, however, was $US190, about 20% below the $US240 level its trading at early Thursday.
Lets unpack this.
There are essentially 3 categories an analyst can assign to a stock: buy, hold or sell. While different finance companies can use synonyms — for instance Barclays uses Overweight (buy), Equal Weight (hold) and Underweight — the ratings boil down to the same idea.
Johnson gives an “Equal Weight” rating to Tesla, so one could assume that he would expect the stock to stay roughly where it is. In a section of his analysis, titled “Why Equal Weight?,” he basically says as much as well: “Although demand remains strong for the Model S and progress is being made on gross margin improvement, we see Tesla shares as fairly valued. We believe Tesla’s current share price reflects success with its Gen III product, in becoming a mass market OEM, and in generating non- automotive revenue, even though uncertainty exists in each of those cases.”
That sounds fairly measured.
Another aspect of any note is the price target, which is Johnson’s best guess, based on all the data he has, of what the share price of the company will be in the relatively near future. In this note, he has Tesla projected for a $US190 per share price. For context, Tesla opened Thursday trading at $US249.75.
It’s like antimatter and matter.
If that’s not confusing enough, Johnson makes an extended analogy comparing Tesla to the quantum mechanics of subatomic particles, and you get the general sense that he does not have a “neutral” outlook on the company:
“One of the enduring puzzles in physics is the asymmetry between antimatter and matter – scientists haven’t found enough antimatter to balance observable matter in the universe, challenging the ‘standard model.’ For Tesla, we wouldn’t be surprised by an asymmetric reaction, challenging our view of how markets should work. This print merits a negative reaction. Yet it’s not clear if the market will price in the risks faced by Tesla. We get it — these days the market appreciates a good growth story, and many find Tesla’s story compelling. But the 2Q print reminds us that Tesla has no shortage of risks and challenges in realising its growth.”
The colourful writing and extended analogy in the note is certainly preferable to the sheer number of bone dry takes from most analysts. But there is a dissonance between the rating and the actual outlook.
To be fair, Johnson has a negative rating on the industry, which may explain why he can simultaneously be neutral on the stock but negative on the price.
The thing about sell-side research …
But still, this may speak one of the big challenges underpinning many of these analyst calls. Sell side analysts have quite a few conflicts of interest — the SEC even wrote over 3000 words diving into all of them — and this can lead to some strange incongruities between the face value rating and the deeper opinion.
Among other things, the analysts want to maintain the favour of the executives of the companies they’re covering. And this adds up to some strange statistics. According to a recent report from FactSet, 48% of analysts rated S&P 500 companies as buys, 46% as neutrals and 6% as sells. The percentages have barely shifted from 2014, 2012 and 2010 too. In fact, the sell percentage is much the same as it was back in 2002.
Sell-side analysts can provide a lot of good information. Most of their job is to know what is going on with these companies. But, investors and market watchers have to recognise that there are some inherent issues with the system and that can lead to a disconnect between analysts’ ratings and what they’re saying or thinking.
For now, hold on to Tesla, but get ready to lose money.
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