Tesla bears are worried, but the bulls won’t be moved
The dust around Tesla Motors’ latest earnings report is beginning to settle after Wall Street sent the automaker’s shares plunging amid price targets and downgrades from multiple firms. Even some of the analysts who have been the most bullish on Tesla are starting to see the cracks appear in the company’s reputation.
Barclays trims Tesla price target again
Barclays analyst Brian Johnson and his team trimmed their price target from $200 to $190 per share and maintained their Equal-weight rating on Tesla. The price cut comes quickly after their last price target cut, which was not long before the company’s earnings report.
In a report dated Feb. 12, Johnson warned investors about getting “caught up with ambitious mid/long-term targets.” He emphasized that if Tesla is having trouble hitting its near term targets, it will probably have trouble hitting its long term targets as well.
Deutsche Bank, Goldman Sachs cut Tesla’s price target too
In their report dated Feb. 12, Deutsche Bank analyst Rod Lache and his team also said they’re reducing their price target for Tesla, slashing it from $310 to $245 per share. However, they didn’t abandon their long term view, instead reiterating that they’re staying focused on the future in contrast to where Barclays analysts are looking.
They don’t see Tesla’s earnings miss as derailing their investment thesis, which assumes that EVs will “achieve cost parity with Internal Combustion vehicles in the not too distant future.”
In their report also dated Feb. 12, Goldman Sachs analyst Patrick Archambault and his team made similar comments about Tesla. They trimmed their price target a bit from $214 to $216 per share and maintained their Neutral rating on the stock. In order to upgrade Tesla to a Buy rating, they need to see more sales in China, “a more conservative design approach to the Model 3” and improvements in “operating FCF that we estimate will be negative $1bn in 2015 before warehouse financing inflows.”
Musk defends capital expenditures
Not all Tesla bulls are dialing back their enthusiasm. One of the topics that came up on the EV manufacturer’s earnings call was capital expenditures. CEO Elon Musk made a bold comment about Tesla’s market capitalization being the same as what Apple’s is right now one day. That statement left Morgan Stanley analyst Adam Jonas “with nervous excitement.”
In a report dated Feb. 12, Jonas and his team said Tesla pressed the “insane button” on capital expenditures, noting that Musk’s comment means the automaker is aiming to be a “much larger company” than they previously expected. The Morgan Stanley team also took the opposite stance of the Barclays team in focusing on the long term rather than the near term.
Huge costs to fulfill demand
Of course big growth comes with big costs, which Jonas says is “a delicate balance for the markets to consider.” He said the pace of demand looks to be “quite good” despite challenging situations like weak sales in China, the strengthening of the U.S. dollar and slowing international sales. The analyst points out that Tesla’s customer deposit balance grew 14%, which was 80% higher than his estimate. As a result, he suggests there are “a lot of wealthy people who still want what Tesla is selling.”
However, he calls the cost of supplying this demand “eye-wateringly high,” as Tesla intends to spend $1.5 billion on capital expenditures this year. That figure is almost double what he had been expecting and up by 50% compared to what the company spent in 2014. Operating expense projections are also nearly 40% higher, mostly due to expenses related to research and development.
Tesla burns cash
During the fourth quarter, Tesla burned through $86 million in cash, which was about what Jonas expected. However, he added that the automaker will probably burn through a lot more than the $40 million he had projected previously. He also said that Tesla’s projected spending levels suggest management wants to hit at least 500,000 units by 2020—many more than the 295,000 he had been projecting.
“The assumptions in our earnings model seem to be at great philosophical odds with Tesla’s much more ambitious growth aspirations,” wrote the Morgan Stanley team. “When thinking about the share price development, the key question we are left with is whether investor appetite can keep up with Tesla’s growth journey and the alignment of forward looking expectations with the capital markets… a balance so important to firms at this early stage of development.
Tesla’s future rides on Model X—for now
Analysts at Evercore ISI and Ascendiant Capital Markets also remain bullish on Tesla. Evercore’s price target is an astounding $320 a share right now, and they also focus on the long term potential of the EV manufacturer.
Analysts George Galliers and Arndt Ellinghorst see Tesla as being well-positioned in the EV industry for several reasons. For one, they say it’s less exposed to risks in the market compared to peers. Additionally, they see “no obvious competition” for Tesla’s cars, which has resulted in “substantial brand equity.”
In his follow-up report to Tesla’s earnings, Ascendiant Capital Markets analyst Theodore O’Neil pointed out that Tesla did not move back the production date for the Model X again. He also thinks concerns about competition are overblown, pointing out that while Tesla shared its patents with the world, it won’t share details on the machinery it uses to assemble its battery packs because that’s a “trade secret.” As a result, he believes the EV manufacturer remains about 10 years ahead of competitors in electric battery technology.
As of this writing, shares of Tesla Motors were up by 0.41% to $203.35 per share.