Wall Street's torrid love-hate relationship with Tesla

Should you buy or dump shares of electric-car maker Tesla? 

On Wall Street, there's no easy answer. That's because a torrid love-hate relationship currently exists between investors and Tesla (TSLA), the maker of revolutionary electric cars. The stock torments Wall Street analysts for a variety of reasons, one of which is that the company continues to fail to meet its targets or promises, much less analysts' expectations.

Those who are opposed to buying Tesla's stock are rabid and passionate in their criticism, questioning whether the company will be able to profitably build the new, lower-cost Model 3 sedan. The few bulls still standing are adjusting their estimates to reflect delays and Tesla's missed goals, insistently noting that the positive long-term outlook isn't really changing.

That hardly reassures the skeptics.

 

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"Tesla executives' conviction levels concerning the Model 3's production stands in stark contrast to the previous quarter," argued Toni Sacconaghi, analyst at Bernstein Securities, one of the most savvy technology analysts on Wall Street. "Tesla's third-quarter results reinforced our concerns," he added.

Its guidance of "lower auto gross margins in the fourth quarter also was of concern, since the company previously stated that gross margins would improve sequentially in the fourth quarter," he added.

So he views Tesla as a "show me story," with its "low margin visibility, a high rate of cash burn and production concerns." Sacconaghi has lowered his earnings estimate for Tesla and reiterated his "market-perform" rating for its stock, with a price target of $265 a share.

Tesla's stock has been on the ropes despite the stock market's exuberant advance this year. Trading at $383 a share in late June, close to its 52-week high of $389, the stock has tumbled since, currently trading at $306.

"Patience" is what Tesla founder and CEO Elon Musk asks of analysts and shareholders, arguing that the Model 3 production delay "is a relatively small shift," considering that the car "is a 10-year program, and we are talking about a few months out of a 10-year program." 

That has hardly convinced the doubters, however, and gave more fuel to some of the Tesla bears' negative arguments.

 

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Efraim Levy, equity analyst at CFRA, reiterated his "sell" rating on Tesla, noting that the adjusted third-quarter per-share loss was larger than what many analysts had expected and that revenues missed the consensus estimate -- and that Tesla missed his gross margin forecast.

But the dire third-quarter results weren't make or break, Levy pointed out, and he doesn't think that Tesla has been derailed, but only delayed. "Still, we see greater pressure on Tesla to meet its one-quarter delayed weekly run-rate of 5,000 Model 3 vehicles produced per week by the end of the first quarter" of 2018, Levy said.

Levy expects Tesla to continue losing money: For 2017, he forecasts the loss rising to $6.25 a share, up from last year's loss of $4.68. He acknowledges that Tesla's story of "innovative electric vehicles with industry-leading all-electric driving range and strong safety reviews is appealing." And that the company's "unique business model and technological leadership give it a margin advantage over peers." But that hasn't changed his "sell" recommendation on the stock. 

Also rating Tesla a "sell" is Colin Langan, equity analyst at UBS, who has a price target of $185 a share. He noted in a recent report that Tesla's cash burn has accelerated in the third quarter as the Model 3's production has again suffered delays. Tesla pushed back the Model 3 ramp from the fourth quarter to the end of the first quarter of next year.

So Langan lowered his 2017 earnings estimate from a loss of $6.40 a share to a loss of $8.85 "to reflect the third-quarter miss and the weak fourth-quarter margin outlook." He also lowered his estimates for next year "to reflect weaker margins in the first half [of 2018] with the slower Model 3 ramp." 

 

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The Tesla bulls, however, remain undeterred. There were "a few Model 3 hiccups, but that's not exactly a shocker," said Alexander E. Potter, analyst at Piper Jaffray, who rates the stock as "overweight," with a price target of $362 a share. The third-quarter results "were a bit choppy," is how Potter described them. But that with all the noise, he said, he doesn't believe "any downward pressure on the stock will be sustained."

Potter expects gross margins to bounce back to the mid-20s by late 2018, "once Model 3 production stabilizes," he said.

Robert Chira, analyst at Guggenheim Securities, is another bull who rates Tesla a "buy," with a price target of $430 a share. "One quarter Model 3 push-out should not impact long-term leverage," he argued. "We continue to forecast meaningful scaling of EPS [earnings per share] toward nearly $14 in 2019 and $20 in 2020," Chira said. And he continues to "forecast total vehicle volumes ramping up to 300,000 in 2018, 550,000 in 2019 and 750,000 in 2020." 

But apart from production problems, Tesla also faces many other challenges, including a possible stripping of tax breaks for people buying electric vehicles. For example, the House Republican tax plan includes a provision that repeals the "Plug-In Electric Drive Motor Vehicle Credit."

However, that's still just a proposal in a tax plan that may possibly change substantially -- or even fail to get passed. Of course, this additional uncertainty doesn't make our original question any easier to answer.   

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