Tesla (TSLA, Financial) stirs up strong passions in both bulls and bears. Indeed, there may be no company so loved -- and hated -- by investors. That has made Wall Street analysts’ jobs especially difficult, since their price targets and forecasts face scrutiny rarely seen in other stocks.
Two venerable investment banks, Morgan Stanley (MS, Financial) and Goldman Sachs (GS, Financial), released new analyst commentaries on Tesla on Tuesday, Dec. 18. Both banks have long-standing relationships with Tesla and its CEO, Elon Musk, but their respective equity research arms have long been at odds when it comes to the electric vehicle company. Morgan Stanley has become known as a very bullish outfit, while Goldman has proven to be a persistent bear. But things may be changing, with opinion at these banks apparently starting to converge. Looking toward 2019, both banks see trouble in store for Tesla.
Here are some of the highlights from each bank’s new Tesla commentary and a discussion of how Tesla might fare in the year ahead.
Morgan Stanley: “Emerging peak” approaching
Analyst Adam Jonas has covered Tesla for Morgan Stanley for a number of years. For a long time, he was considered one of the most bullish Tesla analysts on Wall Street. But in recent months, Jonas has grown considerably colder toward the electric vehicle company. He mentioned a number of other worries heading into 2019 and beyond.
Here are the principal highlights from Jonas’ latest commentary:
Third quarter blowout may not be sustainable. “While we acknowledge the significance of Tesla’s very strong 3Q result, we do not believe investors will assume the company is fully self-sufficient without a more sustained period of execution.”
International market may prove troublesome. “We continue to harbor concerns over whether Tesla will be able to achieve sustainable access to foreign markets, particularly in China but also in the EU.”
A capital raise could help instill confidence. Raising a few billion during Q4 “could reduce many investors’ concerns about financial pressure during a critical time of market expansion and strategic partnership.”
Tesla may not be able to survive on its own.“We are increasingly of the view that the confluence of economic, competitive, regulatory, political, and technological forces may potentially challenge Tesla’s status as a stand-alone entity."
Jonas’ verdict: Post-third-quarter short squeeze and buoyant market sentiment has carried Tesla to near-record highs. But a harsher landscape in 2019 -- and likely weaker fourth quarter -- will dent sentiment. Tesla may thus be approaching an “emerging peak” of market sentiment. Despite the dark clouds gathering (which might even threaten Tesla's survival as an independent company) Jonas reiterated his $291 price target (13% downside risk) and a “hold” rating.
Goldman Sachs: “Lull in demand” incoming
Analyst David Tamberrino stuck to his bearish guns in his latest commentary. As Goldman’s Tesla analyst, Tamberrino has been quite consistent in his criticisms of Tesla’s business and what he considers to be a significantly inflated share price. In his latest commentary, he cited a number of factors he sees as likely to put significant pressure on Tesla’s margins -- and share price -- in 2019.
Here are the principal highlights from Tamberrino’s latest commentary:
- Model 3 demand likely to fall in 2019. “We believe there is a pull-ahead of deliveries and option mix occurring in the U.S. in (the second half of 2018) that will likely create a lull in demand starting in (the first quarter of 2019).”
- Significant margin compression ahead for Model 3. “We believe the bulk of sustainable demand for the Model 3 likely resides at the lower end of the price curve, we believe program margins will likely mix-down as time progresses.”
- European sales will not save Tesla. Bringing the Model 3 to the EU may help temporarily, but falling U.S. demand “may not be fully made up by initial deliveries across Europe.”
- Competition inbound. Tesla’s higher-end lines may face additional pricing pressure as “incremental competition is coming for the company’s established products (i.e., the Model S and Model X).”
Tamberrino’s verdict: An imminent “lull in demand” in the wake of tax credit cuts, combined with margin compression as average sale prices drop, will make for a hard 2019. Thus, Tamberrino reiterates both his “sell” rating and $225 price target (33% downside risk).
Our verdict: Worse than the analysts will admit
Of the two analysts, we are inclined more toward Tamberrino’s view. If anything, the Goldman analyst may be too generous in his price target. The third quarter saw the last of the pent-up demand cleared, especially for the highest priced versions of the Model 3. The mix can only get less favorable from here.
Furthermore, we can certainly agree with Jonas’ conclusion that Tesla’s share price has approached a peak. It seems extremely unlikely that the fourth quarter can dazzle to the same degree, and 2019 looks even bleaker. Furthermore, we agree that there are numerous economic and competitive threats that could severely damage Tesla -- if not render it unable to sustain operations as an independent entity.
Here is the bottom line: Tesla is valued for rapid and sustained growth, and the next couple quarters will demonstrate how ill-equipped the company is to deliver on that promise. We expect an eventual price correction considerably more violent than even Tamberrino projects. Indeed, it would be surprising if Tesla manages to retain even half of its current share price and market capitalization by the end of 2019.
Disclosure: Short Tesla via long dated put options.
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