Tesla, once a darling of Wall Street, has pushed the envelope and not in a good way. Too many problems and issues have finally pushed some long-time supporters to shake their heads and step back.
Wedbush Securities finally decided to “[throw] in the white towel” last month lowering guidance from outperform to neutral, after April’s first quarter earnings release. A report from the firm called it “one of [the] top debacles we have ever seen” in 20 years of covering tech stocks. Then, on Sunday, Wedbush dropped its target price to $230 from $275 a share, saying in another report that Tesla faced a “quagmire” in hitting profitability by year’s end trying to manage insurance, robo-taxis, and “other sci-fi projects” on top of its main concerns.
Wedbush is just the latest case of discouraged bull. Evercore ISI in April dropped Tesla from the equivalent of hold to sell. That made 13 analyst firms tracked by Bloomberg that have an outright sell rating on the company. Ten analysts still show a buy, while another ten have a “hold” rating on the stock.
The differences between the outlooks come down to three things: the type of company Tesla is supposed to be, belief in its technology, and the chance that it can keep afloat long enough to fulfill its promise.
What the bears see
As much as Tesla is involved in deep tech development and innovation, it makes its money selling cars. Unless that continues to improve, the company will need to bring in more money, as it currently burns $1 billion a quarter. Unfortunately for Tesla, its stock set a 52-week low of $195.25 on Monday and closed Tuesday at $205.08, far from a high of $387.46.
“What they’ve achieved is phenomenal,” said Jeremy Aceveco, manager of industry analysis at auto publisher Edmunds. “It’s been completely new—really unprecedented.” However, his question, and that of many others, is whether the company has passed a high point and will be headed downhill.
“The big take away [from the last earnings report] for us is that the demand in the United States really seems to be depleted,” Aceveco said. Sales for Q1 in the US for model 3 deliveries dropped to 23,000 vehicles. That compared to “close to three times as much” in the previous quarter, and that was with full production and a customer waiting list. “That kind of lightning in a bottle for them seems to have run out.”
Although Tesla may be innovating major aspects of electric vehicles and are trying to match production lines to meet the challenge—because typical approaches in the auto industry may not be able to—it has repeatedly missed promised deadlines. Would-be customers may be getting tired of waiting.
Then there is the confidence of the markets, which are the sources of funding cash Tesla needs until it can increase production and ultimate sales to manage its cash flow. Even though the company recently raised $2.7 billion in a combination of stock and convertible notes, CEO Elon Musk told employees in an email last Thursday that there is only enough cash for ten more months, according to Reuters. He promised that every single expense will be reviewed, which means a major distraction for executives who need to solve bigger problems, like getting new factories and production lines working smoothly. The efforts to reach the sales guidance Tesla has set will be “Herculean,” according to Wedbush.
And current management may not be up for it. “If Tesla executes perfectly, they’re still going to face the toughest days they’ve ever faced,” said Erik Gordon, clinical assistant professor at the University of Michigan’s Ross School of Business. The company has squandered a long lead, Gordon adds. “Musk and his fan squad thought Tesla was so far ahead of everyone else that they’d be worth more than GM and all the others,” he said. “That was never true and isn’t true today.”
What the bulls see
And yet. What pushed so many to believe the company’s success dream has been technology that, in their eyes, far outstripped any competitors. The categorization of Tesla as more a tech than auto company comes down to three major areas: batteries, artificial intelligence that runs the autonomous driving feature, and powertrain optimization. According to the bulls, and many others, the company has pushed far ahead of its competitors.
“Tesla is at least three years ahead of any other auto manufacturer and ahead of Google and Cruise Automation, which is part of GM,” said Catherine Wood, CEO of investment fund ARK, which holds a substantial portion of its flagship portfolio in Tesla. ARK’s analysis says Tesla’s batteries get 100 miles more driving range than similar sized batteries from other companies. The company has also logged massive amounts of data from customers’ use of the autodrive feature, and that information is critical to improving self-driving.
Colin Rusch, a managing director at Oppenheimer who is also bullish on Tesla, says the combination of powertrain optimization and battery power and life makes the company “clear technology leaders.” He also notes that Tesla continues to sell a lot of cars, raising the question of whether they can hit the 500,000 mark with their current product sets and an additional 500,000 with the new model Y. “If manufacturing margins hold up, that’s a lot of cash flow,” Rusch said.
Maybe the future for Tesla will be an acquisition by some company that wants the technology. But for now, while the technological promise is far out, the business realities are starting to be felt right now.
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