Bank of America just said there's ‘material risk’ to the long-term viability of Tesla

Key Points
  • Analyst John Murphy believes Tesla acquisition of SolarCity will result in a loss of $2 in earnings per share this year.
  • Murphy sees Tesla shares falling 46.4 percent from Monday's close.
  • Tesla and SolarCity shareholders approved the two Elon Musk companies' merger in November.
Bank of America said there's 'material risk' to the long-term viability of Tesla

Bank of America Merrill Lynch cut its price forecast on Tesla shares on Tuesday, saying the electric car maker's "long-term viability" was at risk because of the acquisition of SolarCity.

The investment firm now believes the stock will be nearly cut in half over the next 12 months because "positive earnings and cash flow [are] now even more elusive" in light of the combination.

"We believe the SolarCity acquisition introduces material risks to the longer-term viability of TSLA, while the recent capital raise only serves to further dilute potential shareholder value," research analyst John Murphy said in a note to investors. He has an underperform rating on the stock.

Murphy sees Tesla shares falling to $165, a 46 percent drop from where the stock closed Monday at $308.03 a share. Shares were unchanged in premarket trade.

Murphy also said he is cutting his 2017 earnings estimate on the combined entity from a 25 cent loss per share to a $2 loss. Looking to 2018, he lowered estimates from $2.05 a share to $1.65 but set 2019 estimates "optimistically" at $4.55 a share.

In November, SolarCity and Tesla shareholders voted to approve the electric car maker's $2.6 billion acquisition of the solar power company. SolarCity has struggled financially despite revenue growth, while Tesla has continued to burn cash in pioneering the electric vehicle market.

Elon Musk is chairman and CEO of Tesla, and chairman of SolarCity. Tesla did not return an email for comment.

Here are some of Murphy's other concerns about the combined Tesla-SolarCity:

  • The solar company acquisition should "exacerbate TSLA's serious cash burn problem, at least in the near-term." Similarly, Murphy anticipates "the SolarCity business burning cash through our forecast period."
  • The combined company likely depends heavily on the automotive business: 84 percent of total revenue and 97 percent of gross profit, he estimates.
  • The "Model S may be experiencing a typical spike and burnout" and "without an all-new or next-generation Model S, we think TSLA could see Model S volumes fade, even if prices are lowered."
  • "Shareholders seem to come second" as Tesla pursues its mission of vertical energy integration because the company has raised capital every year since 2008, Murphy said.
  • Those shareholders may eventually lose confidence in the stock: "While we recognize that TSLA is a growing top-line business, we think it is unlikely that investors would continue to supply the company with incremental low cost capital in perpetuity if investments fail to generate return."

— CNBC's Robert Ferris contributed to this report.

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