Tesla is 'waking up' from its Model 3 dream

Gett ImagesElon Musk
  • Wall Street analysts are responding to Tesla’s announcement last week that it would lay off about 7% of its staff due to pressure on profits and Model 3 production challenges.
  • RBC Capital Markets on Tuesday slashed its price target and downgraded the stock, saying Tesla is “waking up from the dream” it sells to investors.
  • Watch Tesla trade live here.

Tesla has long promised its Model 3 sedan would be a vehicle for the masses, at a price point more affordable than its luxury cars. But it has had difficulty keeping up production, which has some analysts concerned about its sustainability.

Last week, CEO Elon Musk said the company would lay off approximately 7% of its staff – around 3,000 employees – due specifically to pressure on profits and the Model 3’s production challenges. Wall Street has, largely, not responded in kind, and on Tuesday another firm said it was lowering its rating on Tesla shares.

“While the strategy of fulfilling the high end to bring cost down for the low end had good intentions, we believe Tesla underestimated the cost curves and manufacturing side of the equation,” RBC Capital Markets analyst Joseph Spak told clients on Tuesday under the headline, “Waking up from the dream.”

“34 months post Tesla offering the promise of a $US35k M3, the car still does not exist and Tesla admits they can’t make it profitably.”

In addition to slapping an “underperform” rating on the stock, Spak slashed his price target from $US290 to $US245 per share, implying a drop of nearly 17% from current levels. Tesla fell 2% in pre-market trading Tuesday, to around $US293.90 a share.

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“It’s not that we don’t believe Tesla can grow over time, our model shows solid [long-term] growth,” Spak said. “But the current valuation already considers overly lofty expectations.”

Still, at a difficult moment for the company, Tesla received approval this week to begin selling its Model 3 in Europe which, along with China, is expected to be important growth sources for the model’s sales.

Other experts covering Tesla have echoed a similarly dim outlook. On Monday, Goldman Sachs analysts led by David Tamberrino reiterated the firm’s bearish 12-month price target of $US225 a share and “sell” rating.

“Altogether, we believe that 2019 is shaping up to be another choppy year for Tesla and its shares as it navigates the US Federal Tax Credit phase-out and mix-down of its Model 3 program,” Tamberrino said. “Ultimately we continue to see downside to consensus expectations over the coming years and expect the company’s shares to follow.”

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Citi analysts maintained their “sell/high risk” rating on the stock, pointing to the company’s latest update as a confirmation of “sustainability concerns.”

However, some Tesla observers say the company slashing its workforce is no reason to grow negative on the name. Jefferies analysts said it’s “part of the process of reducing Model 3 price point.” And Oppenheimer said job cuts pointed to the Tesla’s maturation as a company.

Tesla shares have fallen 16% over the past year. Shareholders will receive a fuller picture of the company’s financial health when the company reports fourth-quarter earnings next Wednesday.

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