Tesla shares have been on an epic run since the beginning of the year, up 50% at one point.
They’re still way up, but since fourth-quarter and full-year 2016 earnings were reported last week, the stock has been getting clobbered.
On Monday, Goldman Sachs analyst David Tamberrino, who has assumed Tesla coverage duties from Patrick Archambault, downgraded the stock from “neutral” to “sell” and dropped his target price to $US185 from an already bearish $US190.
Shares were down 5% in early action on Monday, to $US244.
Tamberrino focused on the factors that have typically fuelled the bear case for Tesla, which in any case has always been a volatile stock, given to wild spikes and swoons of the sort we’re now witnessing. His note highlighted potential issues with the company’s cash burn, the difficulties of integrating SolarCity after a $US2.1-billion acquisition last year — and most importantly, the expectation that the Model 3 mass-market vehicles won’t launch as scheduled in 2017 or achieve sufficient production to move the needle for investors.
Here’s the salient language on the Model 3 from the note:
We believe the Model 3 will have a more subdued launch curve than the company is targeting as some suppliers have expressed concern around final designs not being locked down. As a result, we expect the company to achieve mass market volumes (i.e., above 100k annualized run-rate) in 4Q18 vs. Tesla’s target of 4Q17. Historical operational execution also points to a more gradual production ramp (though we do expect some improvement from the Model X) than Tesla is guiding. Further, as we break down the componentry costs for Tesla’s vehicles, we find that the Model 3 should contribute negative operating margins until the company can break the 100k per year unit mark (we forecast in 2019) and/or lower battery cost to $US100/kWh (we currently forecast this to occur by 2020E), even at an average price of $US45k — which we assume is the likely selling price (above the $US35k base) given the technology and hardware packages for the vehicle.
What they’re worried about
Goldman has generally edged toward the bearish side of Tesla prognostication or occupied a middle ground relative to other firms, whose price targets have at times been above $US400 (Tesla has never broken through the $US300 barrier, although it’s come close).
There’s no question that Tesla will launch the Model 3 in late 2017, but it’s also unlikely that production will ramp quickly until some point in 2018.
What’s more, Tesla will still spend much of its cash-on-hand, around $US3.5 billion, to launch the Model 3.
So Tamberrino’s generally bearishness is justified and, from the point of view of an investor, responsible. His call on the stock price is consistent with previous Tesla slides, and at the moment, a Tesla sell-off makes sense, given how high shares surged over the first two months of 2017, unmotivated by any substantial events. Profit-taking is entirely justified.
Right now, the Tesla bulls and bears are dividing over the Model 3. That makes sense, but there are different varieties of division. Some analysts assume that the disruptive potential of a $US35,000 Tesla is considerable, and although the company might now be able to cash in right away its nearly 400,000 pre-orders for the car, the writing is on the wall.
More circumspect analysts, such as Tamberrino, assume that the Model 3 launch and rollout will be as messy as with Tesla’s previous vehicles. Tamberrino also makes the essential argument that Tesla’s shift from niche, luxury automaker to mass-market car company isn’t necessarily the best thing for the bottom line — and that’s before we even deal with the solar business, the energy storage business, or building a massive battery factory in Nevada.
The story here is that the pullback from the early 2017 rally was inevitable, given that Tesla wasn’t in a good position to offer another surprise profit for Q4 as it did in Q3. In retrospect, a potential tax cut and Donald Trump’s made-in-USA manufacturing policies couldn’t justify a Tesla market cap that was within a few billion of Ford’s. Once attention returned to the Model 3, as well as the challenges of the SolarCity deal and the accelerating pace of cash burn in 2017, the downgrades and price-target reassessments on Wall Street could begin.
The question isn’t how far the stock will drop — it often falls pretty far — but rather how robustly it will recover if the Model 3 hits the streets on schedule by the end of the year. That’s what Wall Street will spend 2017 trying to figure out.
Get the latest Goldman Sachs stock price here.
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