Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Tesla (NASDAQ: TSLA) stock is on a rocket ship -- up more than 80% over the past year -- but is that rocket about to crash?
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That's the disturbing conclusion of an analyst note just out today from the bankers at Jefferies & Co., who worry that despite absorbing SolarCity's solar panel business, and despite building a gigafactory to churn out batteries for its cars -- and putting all of this under the same roof as its Tesla electric car business -- Tesla is not likely to reap much benefit from building a vertically integrated electric-powered company. And that's bad news for Tesla's stock price.
Here are three things you need to know about that.
1. Good news first
Let's start with the good news. Yesterday, analysts at R.W. Baird reported back from a tour of Tesla's new Gigafactory that "Tesla's battery cost reduction and capacity expansion efforts are on track." As explained in a note on TheFly.com yesterday, Baird believes that once Tesla's battery manufacturing facility is fully operational, it will be able to crank out 150 gigawatt-hours worth of cells every year, achieving a level of scale that will permit Tesla to lower the cost of producing batteries for its cars and Powerwall home battery systems.
With lower input costs, Baird sees Tesla stock earning enough to be worth $411 per share within a year.
2. But is it all for naught?
That sounded like pretty good news -- for about 24 hours. What turned the news on its head, and what's driving Tesla stock down today, is a report out of Jefferies that contradicts Baird's optimism. As explained today in an article on CNBC.com, Jefferies has just initiated coverage of Tesla stock with an underperform rating and a $280-per-share price target that forecasts a 27% decline in Tesla's stock price over the next 12 months.
What makes Jefferies so bearish? Surprisingly, Jefferies' pessimism is largely inspired by the same thing that has Baird feeling bullish about Tesla: batteries. On the one hand, Jefferies agrees that Tesla's batteries are falling in cost. Problem is, the company's "product mix" is "declining faster" than the cost of its batteries. While consumers may be thrilled with Tesla's offer to sell them electric Model 3 sedans for $35,000 (about half the cost of a Model S), selling a lot more cars for a lot less money than Tesla has been charging for the Model S results in a less profitable "product mix" for Tesla.
Result: Unless input costs begin falling at least as fast as sales prices for Tesla products, Jefferies worries that "Tesla's ability to generate [the] 30+% gross [profit] margin required to support its vertically integrated business model" will fail, and the company won't be as profitable as investors hope.
3. How much less profitable will Tesla be?
Revising its assumptions and tweaking its projections, Jefferies argues that Tesla will probably lose $8.04 per share this year, $6.65 per share next year, and $3.26 per share in 2019 -- becoming profitable, at long last, no sooner than 2020.
Why this is bad news for Tesla
Tesla admittedly has a long history of losing money. Tesla investors are used to this. Even with Tesla's losses swelling in H1 2017 (losses surged from $575 million in last year's first half, to a disconcerting $666 million so far this year), the stock has continued its climb. So if all Jefferies were saying is that Tesla will continue losing money for a few more years, that might not be so bad.
The real problem is that after exhibiting so much patience with Tesla, and for so long, investors may have been getting their hopes up that a light was beginning to glow at the end of the tunnel, and rushing to buy just before profits arrived.
Prior to Jefferies releasing its note, you see, Wall Street analysts had been telling investors they could expect to see Tesla begin generating profits by 2019. Certain uber-optimistic analysts (such as Guggenheim) had begun clambering cautiously out on a limb to predict Tesla profits by as early as 2018.
Now, Jefferies is shaking that branch. It's telling investors to kiss that happy prospect goodbye. Not only won't profits arrive early in 2018, says Jefferies, but they might not get here in 2019, either. After patiently waiting for more than a decade already, investors may now have to wait another two to three years to see Tesla finally turn profitable.
Little wonder investors are selling Tesla stock today.
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