Tesla Motors Inc (NASDAQ:TSLA) has received a sizable price target cut and downgrade from analysts at Goldman Sachs. They see risks related to management’s capital deployment for the pending acquisition of SolarCity Corp (NASDAQ:SCTY) and warn that Wall Street might begin revising its estimates downward. Despite all of this, their third quarter earnings estimate is significantly higher than consensus.
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Tesla (TSLA) downgraded to Neutral
You may recall that Goldman upgraded Tesla Motors Inc (NASDAQ:TSLA) to Buy in May. The firm was blasted for that upgrade not long after for an alleged conflict of interest because it came hours before the automaker’s secondary offering was announced—with Goldman as an underwriter. The firm tried to deflect the allegations using the “Chinese wall,” stating that its research arm was not privy to what its other divisions were doing, but questions still linger.
In a report dated October 6, analysts David Tamberrino and Mariel Kennedy said they downgraded Tesla from Buy to Neutral and slashed their six-month price target from $240 to $185. Following that downgrade, the EV maker’s shares slipped in heavy trading, falling by as much as 3.43% to $201.30. By early afternoon, more than 3.6 million shares had changed hands, compared to the average daily volume of 3.3 million shares.
A positive nugget tucked in the Tesla (TSLA) downgrade
The Goldman team warned that if Tesla Motors Inc (NASDAQ:TSLA) delays the Model 3 launch, which is set for late next year, it would likely be bad for its stock. They also feel that management’s use of capital to acquire SolarCity adds risk. However, they’re not more negative on the automaker because its third quarter delivery number was solid. Also they think Tesla might be able to post positive earnings per share in the third quarter because its third quarter deliveries were half of its guidance for the second half of the year.
The Goldman team’s third quarter estimate for Tesla Motors Inc (NASDAQ:TSLA) now stands at 28 cents per share, which is well ahead of consensus at 7 cents per share.
TSLA earnings estimates may be revised downward
Their earnings estimate for the full year is also well ahead of consensus at losses of 59 cents per share against the consensus of 93 cents per share in losses. However, their estimates for 2017 to 2019 are 48% lower than consensus, on average.
One reason is because they expect the Model 3 ramp to go more slowly than what most believe. They also note that Tesla continues to invest heavily right now, so selling, general, and administrative expenses are expected to go higher with the Model 3, as will research and development costs with the mass market EV and other new products.
Tesla – SolarCity combo creates “higher risk entity”
The Goldman analysts believe Tesla’s planned acquisition of SolarCity creates a business with higher risk than what the two companies have when operating separately. They note that both companies are high growth and high cash burn, and if they were combined, the ongoing capital needs and net leverage could go even higher. Their analysis suggests free cash flow burn of $2.4 billion to $2.5 billion for next year and $1.3 billion to $1.4 billion in 2018. They peg net leverage rising to between 6.6 times and 6.9 times for 2017 and .5 times to 3.6 times for 2018 after the combination. By comparison, they estimate Tesla’s current net leverage as a standalone company at 1.1 times and 0.9 times, respectively.
Devonshire calls for an investigation
Goldman seems to be treading on thin ice with its coverage of Tesla Motors Inc (NASDAQ:TSLA). The timing of the upgrade earlier this year had many within the investing industry crying foul because the firm upgraded the stock just before the announcement of a secondary offering of Tesla stock that it was underwriting.
Devonshire Research portfolio manager Matt Stack tells ValueWalk that it was only a matter of time until Goldman downgraded it and that the situation quickly became “an after-hours laughing matter.” He also believes the SEC should open an investigation into the matter because whether or not anyone at the firm did anything wrong, the whole situation just looks bad.
“So today’s downgrade is no surprise in the context of the social network of Goldman I think it hurts Goldman’s professional dealings,” Stack said. “The only last thing I would say is that the SEC alone can investigate whether Goldman’s internal compliance procedures were really in play when the analyst and the sell-side team were pumping the stock while in the immediate aftermath, Goldman’s PMs were dumping the stock. We have a committee called the SEC for a reason; they’re there to investigate these cases, and I hope they do their job.”
Stack feels that now that Goldman has downgraded Tesla, other firms may follow suit.
“I don’t know any other analysts who would want to be the last man standing on the long [Tesla] call,” he added.
It must be noted that Devonshire has been very public about its short thesis on the EV maker. Earlier this year, the firm accused Tesla Motors Inc (NASDAQ:TSLA) of having a financing model that mirrors scams.