- Tesla stock has gained roughly 282% this year amid an epic rally that's sent it to multiple all-time highs.
- Some analysts, including
Bank of America , say that the stock's run is not supported by fundamentals. - Here are 10 reasons to be cautious on
Tesla , according to Bank of America. - Watch Tesla trade live on Markets Insider.
- Read more on Business Insider.
Investors have many reasons to be cautious about Tesla's stock, even amid the company's epic roughly 282% rally this year, according to Bank of America.
The "hyperbolic" move of Tesla's stock in recent weeks has been supported by a trend into smaller niche stocks such as Nikola, the ongoing rotation into growth stocks, and technical buying ahead of the company's potential addition to the S&P 500 index if its quarterly earnings Wednesday show a profit, analysts led by John Murphy wrote in a Wednesday note.
"In our view, the $1,500+ stock price is not supported by fundamentals, with valuation driven largely by momentum and low rates," said Murphy. Bank of America reiterated its underperform rating on the stock, but still boosted its price target to $800 to reflect revised forward estimates.
Tesla still has ample room to grow, and its execution this year has been fine especially given the economic backdrop, according to the note. Still, the analysts "question whether the company has sustainably turned a corner on profits and cash generation," said Murphy.
Murphy also addressed a "self-fulfilling" prophecy he sees in
Here are 10 reasons Bank of America gives for being cautious on Tesla.
1. Volume growth is real, but constrained by capacity expansion and capital availability
"While we give TSLA much credit for growing volumes over the past decade (2019 deliveries of 367k units), the company still produces just over the capacity of 1 traditional OEM plant (250-300k units)," said Murphy.
2. EV addressable market is not yet unlimited, and likely smaller than appreciated
"Our estimates for EV average transaction prices (ATPs) of $44k by 2025E and $38k by 2030E indicate that still much of the total market will likely be unavailable to EVs through our forecast period, which could be exacerbated by a more rapid roll-off of EV tax credits to consumers," the analysts wrote.
3. Growth may also be constrained by product portfolio expansion/refresh or lack thereof
Tesla "may also face challenges in further growing volumes with a narrow product portfolio with no real model refreshes," according to the note. "Specifically, Model S/X appear to have already experienced a traditional spike and burnout pattern after/launch ramp while Model 3 continues to grow with some fluctuations, although demand may be cannibalized to some degree by Model Y as it is introduced."
4. Profitability and cash flow are not great or consistent, and are major risks
"While profits and cash flow are certainly better than in prior years, they are not consistent, and sustainability remains a question," said Murphy. "In fact, TSLA's own forward guidance is for positive GAAP net income and free cash flow going forward, with possible temporary exceptions, particularly around the launch and ramp of new products."
5. Capital intensity of growth indicates TSLA is far from a FAANG company/stock
Tesla's growth is accompanied and driven by "massive capital commitments to build out capacity and introduce new models," which makes its business "much less scalable than that of a technology company," according to the note.
6. TSLA is still not necessarily self-funding and should raise more capital
Tesla is still raising capital, according to the Bank of America note, and its "pathway to becoming a self-funding entity is still dubious."
7. Cost of capital is negligible for now and a major, but possibly temporary, advantage
"At a $1,500+ current stock price, another gap has opened for TSLA to raise significant capital in order to fund its future growth, which we believe the company should do," said Murphy. "We believe TSLA can essentially raise as much capital as it needs and/or wants, but as management has demonstrated hubris in past years by not operating like a company in need of capital, it may not execute a raise, despite our view that it would be advantageous/prudent.
8. Credit investors have hopped on the bandwagon as equity cushion grows
"At various points in time, as recently as June 2019, TSLA bonds have traded below 85 cents on the dollar, which would generally indicate a company in financial duress," Murphy wrote. More recently, however, "the bonds traded this low despite a stock that was still around $185 and a market capitalization still over $40bn, suggesting an extreme disconnect in views between credit and equity investors," he said.
9. Creative accounting and presentation helps on a transitory basis
While none of Tesla's "creative accounting methods" is technically wrong, "they do mask the core results for the company, which we believe may persist in the future and represent a major risk," said Murphy. An example is the "non-GAAP method of lease accounting and revenue recognition" Tesla used for several years until 2016, according to the note.
10. In a Momentum to Value rotation, TSLA is one of the highest flying Momentum stocks
"In our view, it is the broader momentum and short squeeze that have been more significant drivers for the stock to the current $1,500+ level than necessarily anything fundamental that has changed for TSLA or long investors becoming incrementally more constructive on the stock," said Murphy.