JPMorgan cuts its Tesla expectations after the company announced a $2.4 billion funding round - but says there's one big plus to the offering

Graham Rapier

May 6, 2019, 20:10 IST

JPMorgan cuts its Tesla expectations after the company announced a $2.4 billion funding round - but says there's one big plus to the offering

Reuters
Tesla CEO Elon Musk exits after attending a S.E.C. hearing at the Manhattan Federal Courthouse in New York

Tesla announced - and then expanded - plans for a fresh capital infusion last week totalling near $2.4 billion.
JPMorgan, still a Tesla bear, is applauding the move, and told clients Monday the offering should help put a floor on the stock's price.
Shares of Elon Musk's electric automaker have been slowly crawling their way out of multi-year lows after a disappointing first quarter earnings report in April.

Tesla is raising more than $2 billion in new funding, the company disclosed last week, and even the most bearish of Wall Street analysts are enthused with the long-awaited move.

"We applaud Tesla's decision to raise capital but believe at the same time it should serve to highlight the potential ongoing dilution risk should the firm not prove more successful in stanching free cash outflow (it burned -$0.8 bn in 1Q19)," Ryan Brinkman, JPMorgan's autos analyst, said in an note to clients on Monday.

Tesla's stock price gained about 4.5% on Friday, following the expansion of the capital raise, on top of another 6.9% gain when the company originally announced the offering on May 2. The gains have helped shares claw their way back from Tesla's lowest trading prices in years, after a disappointing first quarter earnings report sent the stock plummeting.

But while JPMorgan is happy with Tesla's decision to finally raise capital, the dilution of new shares hitting the market is cause for lowering its already bearish estimates, the bank said. Looking forward, it expects Tesla to lose $0.85 per share in 2019, up from $0.75 previously. 2020 EPS estimates have been lowered to $5.85 from $6. But JPMorgan's price target remains $200, with an underweight rating on the stock.

As shares crossed back into their usual territory Monday morning, near $250 apiece, JPMorgan says a hedging move used by Tesla in the capital raise could help the stock from plummeting again as it did last week.

Tesla will be "using some of the proceeds to enter into anti-dilutive hedging transactions and the majority for general corporate purposes, which we estimate has the potential to help put a floor under the stock over the near- to medium-term as liquidity concerns are likely to fade for now," the bank said.

"At the same time, however, the transaction limits prior potential upside on a per-share basis, given dilution."

The average price target for Tesla's stock, according to Wall Street analysts polled by Bloomberg, has fallen drastically in recent months to $300 per share. 14 of the analysts rate the stock a sell, with 10 saying hold and 11 saying buy.

"Although both technology and execution risk seem substantially less than was once feared, expansion into higher volume segments with lower price points seems fraught with greater risk relative to demand, execution, and competition," JPMorgan said. "Meanwhile, valuation appears to be pricing in upside related to expansion into mass-market segments well beyond our volume forecasts for the Model 3."