Tesla Inc. (TSLA) entered 2020 on a high note. The electric vehicle (EV) company enjoyed a surging share price amid increasing investor enthusiasm and growing public confidence in its future success. In February, the stock briefly reached $968.99, its all-time high.
Unfortunately, the fun was not to last for the EV automaker. The rapid spread of the novel coronavirus (Covid-19) compelled many manufacturers to shutter production. The “Big Three” automakers – Ford (F), General Motors (GM) and Fiat Chrysler (FCAU) – announced they were closing their factories worldwide on March 18. While Tesla CEO Elon Musk resisted taking such action, he was eventually compelled to comply with government instructions to idle the company’s principal plant in Fremont, CA.
With production shuttered and global car deliveries showing signs of total collapse, Tesla’s official guidance for more than 500,000 deliveries in 2020 looks increasingly dubious. Unsurprisingly, numerous Wall Street analysts, including some of the most bullish on the name, have felt compelled to revise their delivery estimates for the quarter and the year.
Wedbush: Cash burn to intensify
Dan Ives of Wedbush Securities is a long-time Tesla fan, but even he has found it difficult to see the silver lining in the face of the Covid-19 shutdown. According to the Wedbush analyst, deliveries will fall well below Street expectations. On March 30, he published a note estimating 82,000 deliveries in the first quarter. As a consequence, Wedbush has set a neutral rating on Tesla with a price target of $425. Still, Ives managed to sound a positive note about the future, despite the near-term risk of falling deliveries and escalating cash burn:
“While cash burn will be heightened in the near term due to this anomalous global situation, we believe the longer-term trends remain very healthy and $20 of annual earnings power down the road is achievable and still remains the target bogey to hit over the coming years for Musk & Co.”
Ives also warned that the analyst consensus estimate remains artificially high thanks to several estimates not having been updated since the Covid-19 outbreak and subsequent factory shutdown and demand collapse. Ives evidently feels analysts’ second-quarter delivery estimates will likewise need substantial revising.
JMP: Sharp margin declines inbound
Joseph Osha of JMP Securities has been one of Tesla’s most vocal cheerleaders for some time. Yet, on March 31, he issued an updated note on the name in which he cut his price target from $1,060 to $840 – a 20.8% reduction.
Osha also cut his 2020 delivery estimate by a marginally less severe 17%, from 523,000 to 433,000. Osha cited a number of factors driving his revisions, and offered a tentative outlook for the months ahead:
“For Q1, we think more of the reductions likely flowed from Asia and Europe, with the situation reversing in Q2 and the U.S. market leading the decline. We assume that Tesla will be allowed to restart production in early May, both in Fremont and Nevada, although we do not believe the company will move back to full output until later in the year.”
Osha predicted that Tesla will not take much action to reduce its fixed costs, which will contribute to “sharp gross margin declines” during the first half of 2020.
Tesla: No guidance revisions yet
Tesla’s official delivery guidance was announced in its fourth-quarter earnings report, published in January. Having managed 367,500 deliveries in 2019, the company announced that it would “comfortably exceed” 500,000 in 2020. As can be seen from the recent analyst downgrades and downward revisions, faith in Tesla’s ability to achieve this goal has dwindled. Yet Tesla has thus far failed to alter its guidance. Tesla’s silence on revised delivery guidance is not wholly surprising, as the company has rarely adjusted its guidance between quarterly reports.
Tesla has long been noted for its unconventional approach to investor relations. A case in point is the company’s tendency to email analysts ahead of delivery announcements with summaries of the analyst consensus. This quarter has been no exception. This week, Tesla senior director of investor relations Martin Viecha reached out to analysts with two sets of consensus estimates, one featuring only estimates that have been revised in response to Covid-19, and one featuring all analyst estimates. According to Viecha, the consensus “shutdown reflected” estimate is 82,500 deliveries, while the overall consensus stands at 88,046 deliveries.
According to long-time Tesla watcher TeslaCharts, this is clearly a case of “managing down [first quarter] delivery expectations.” It is hard to argue with this point in light of the evident implosion of the new vehicle market.
Verdict
Trading at about $532 at time of writing, Tesla’s stock is down nearly 50% from its February all-time high. Shares actually climbed about 6% during the first several hours of the March 31 trading session, despite the recent analyst revisions. Clearly, there is still a great deal of enthusiasm buoying this name.
Yet, for all its popularity and hype, Tesla is still an automaker that cannot make vehicles for the foreseeable future. Meanwhile, larger, better funded and sustainably profitable automakers like Ford have faced credit downgrades in recent days. Credit-rating agencies have increasingly sounded alarms about the potential for long-lasting economic shocks to the auto industry. With far less cash on hand than its larger, profitable rivals, Tesla may find the next several months extremely challenging. Indeed, as a luxury automaker, Tesla is even more vulnerable than its industry peers to economic shocks, as consumers delay or forego expensive purchases.
As Covid-19 bites deeper, we expect Tesla’s still-soaring share price to be forced back to earth. Bullish investors counting on a rapid return to growth may want to think again.
Disclosure: Author is short Tesla.
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