Tesla (NASDAQ:) is in the grip of extreme scrutiny these days. Some of Wall Street’s top analysts are presenting their worst-case scenarios for the electric-car maker, which not long ago was seen as the best transportation stock.
Morgan Stanley analyst Adam Jonas, who had a price target of $379 on Tesla last year, raised the possibility of the stock falling to $10 in a private call with investors that was reported by the media outlets. “Tesla was seen as a growth story,” he said on the call. But:
“Today, supply exceeds demand, they are burning cash, nobody cares about the Model Y, they raise capital and there’s no strategic buy-in. Today, Tesla is not really seen as a growth story. It’s seen more as a distressed credit and restructuring story.”
Two other Wall Street analysts in their most pessimistic scenarios said the shares could fall to $36 or less. Another called the company’s problems a “Code Red.”
This extremely bearish analysis pretty much sums up what’s happening at Tesla and with its stock price this year. These views also vindicate our persistent negative stance on Tesla this year. Trading at $196.59 at yesterday’s close, Tesla stock has lost more than 41% of its value this year, reducing the company’s market capitalization by about $30 billion since the summer of last year.
There are two negative developments over the course of six months that have played a major role in turning some leading analysts bearish on Tesla. Let’s take a deeper look:
1. Ambitious Demand Forecasts
Tesla’s share price had always reflected investor confidence that this high-tech car company would revolutionize the industry by producing cheap electric cars for the mass market, and that its technology and unique manufacturing philosophy would allow it to do so profitably. But that trust is vanishing fast this year, partly due to Tesla’s never-ending internal challenges and Elon Musk’s missteps, and partly due to the changing market dynamics.
Sales of Tesla’s cheap Model 3 sedan dropped sharply in the from the final three months of last year, despite several rounds of price cuts. Combined deliveries of the higher-priced Models S and X, which are sold at a profit, fell by 50% from the previous quarter.
According to a note this week by analysts at Sanford C. Bernstein & Co., Tesla will soon face tough competition from European carmakers, who are better positioned to compete.
Tesla appears to be structurally unprofitable, with high fixed costs, a much smaller market for its models than expected and technology that’s no longer unique, they said. In contrast, Daimler’s (OTC:) Mercedes-Benz brand and BMW (OTC:) consistently generate cash and are set to widen their electric lineups soon.
That challenging environment means Tesla isn’t going to make an operating profit on a $35,000 electric sedan anytime soon unless demand surges fast and the company is able to handle the problems in its supply-chain. But a 31% decline in vehicle deliveries from the fourth quarter has heightened concern that Tesla is reaching the peak in buyers for its more mainstream vehicle.
Why the drastic reaction from the market? The answer is that it confirms investors’ worst fears about the credibility of Tesla’s latest growth projections. If those growth assumptions were based on a too-optimistic scenario, then investors have little reason to cling to Tesla stock, which has suffered a host of setbacks during the past year.
2. Cash Crunch Is Worsening
At the center of the confidence crisis Tesla is currently facing lies the company’s fast depleting cash reserves, and thus the resources to pay for its increasing liabilities. Tesla’s total liabilities, including debt and accounts payable, now top $22 billion, while its cumulative losses are approaching $6 billion.
What’s making investors nervous is how Mr. Musk will pay for these liabilities if demand for the Model 3 doesn’t pick up and he is unable to contain costs. In the most recent quarter, Tesla posted a $702 million loss attributable to common shareholders for the first quarter. On an adjusted basis, the loss was $2.90 a share.
Tesla burnt through about $950 million of cash in the first quarter, adding to a total $5 billion of cash consumption since 2017. Early in May, the company managed to raise $2.35 billion in new capital, with $750 million of common stock and $1.6 billion from convertible bonds. The funding, according to Morgan Stanley, is only enough to provide a 12-month bridge.
Tesla no longer expects to make a profit in the second quarter, instead forecasting income in the third period. It affirmed its guidance of delivering up to 400,000 vehicles this year while noting that production will be “significantly higher” than deliveries because of the delays overseas.
The dramatic plunge in Tesla’s share price shows the company is fast losing investors’ faith, triggered by dwindling demand for its cars and the shrinking of its ability to generate internal cash flows to run its business. After losing more than third of its value, the stock is in distressed territory, where only a slew of miracles could help to reverse the course.