Tesla gets hit with a downgrade as analyst worries about Model 3 production, profitability, and cash burn
- Needham analyst Rajvindra Gill downgraded Tesla to "underperform" on Thursday, citing Model 3 profitability and increasing competition.
- Shares fell about 2.5% following the downgrade.
- Follow Tesla's stock price in real-time here.
Tesla sank 2.5% in early trading Thursday after Needham downgraded shares to "underperform," citing disappointing Model S and X sales, increasing margin pressures, and a flurry of electric-vehicle competition from traditional automakers.
"We are downgrading Tesla to Underperform from Hold as we believe the stock is still overvalued despite falling 16% from its June 2017 peak (the S&P 500 is up 15% over the same 56-week period)," analyst Rajvindra Gill said in a note to clients Thursday."Our bearish stance assumes: 1) slower sales of Model S/X on increased competition, possible cannibalization from Model 3 and expiration of credits; 2) slower gross margin improvement for Model 3 based on persistently high manufacturing costs, namely low yields; 3) negative impact to gross margin as ZEV credits decline in 2019; 4) lower energy revenue given the recent restructuring and lastly 5) an unsustainable capital structure with a projected $6 billion free-cash-flow burn through 2020 and a $1.486 billion note due in 2019."
Tesla on July 1 finally hit its goal of producing 5,000 Model 3 sedans per week thanks to an ad-hoc assembly line constructed in a tent next to its main factory, but total deliveries still fell short by about 10,000 vehicles.
The Model 3, hawked as Tesla's first mass-market and affordable car, was supposed to come with base price of $35,000. Due to profitability issues, it has not yet been produced at that price and is not currently available for order. Instead, the electric-car maker has been comparing its more expensive versions to luxury competitors like BMW.
To be sure, experts have said the car could be profitable, after stripping it down to analyze the cost of construction, but Needham remains unconvinced. The firm cut its gross margin estimate for Tesla's total profit by the end of the year to 16.3% - well below the Wall Street consensus of 19.9%.
A tax credit that will begin to roll off next year - resulting in more expensive cars - could also hurt Tesla's ability to sell new cars, Needham says. Other car makers who haven't yet hit the cap that Tesla has, can continue to reap the federal tax benefit.
Finally, like many other Wall Street analysts, Needham is concerned about Tesla's cash burn. While the company has repeatedly said it will be profitable this year, analysts at firms including Goldman Sachs and UBS think the company will likely have to raise another round of capital in order to pay off debt that's coming due and keep up production.The newly bearish stance also cites increasing competition from traditional automakers.
"In the 2021-25 timeframe, we expect to see a substantial increase in the number of EVs in the market, based on the announced plans by major auto manufacturers," Gill said. "While many of these roadmaps will likely change, we note that many auto manufacturers are now putting the money behind these roadmaps, including development of brand new EV platforms, investments into battery technologies, building new facilities, and even developing charging networks."
Needham's new sell rating for the stock comes without a price target, but the consensus from analysts polled by Bloomberg has fallen to $312 this week - about 1.2% below where shares were set to open Thursday.
Sell ratings by analysts now outnumber both buy and hold ratings, according to Bloomberg data, with 12 analysts advising clients to "sell" and 10 advising both "buy" and "hold."
Tesla shares are down 1.2% this year.