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Tesla was downgraded to underperform by RBC Capital, which said that the electric car maker has finally started to give some straight talk to investors about its future growth, but many are still not listening because they are still too enthralled by the company's founder and CEO Elon Musk.
Analyst Joseph Spak writes:
"It's not that we don't believe Tesla can grow over time, our model shows solid LT growth. But the current valuation already considers overly lofty expectations. For instance, let's assume 1mm [Model 3] units @$55k ASP, 12 percent EBIT margins, no interest/equity raise all by 2025. This is undoubtedly solid earnings, but at a more 'mature' 15x P/E, the discounted back value is ~$195, meaning even in an optimistic case at least 1/3rd of today's price is an 'Elon premium'."
Tesla shares fell 1.5 percent in premarket trading Wednesday following the call. Through Tuesday, the stock was down 10 percent on the year to $298.92.
"The company seems to be more tactful with messaging which is a long-term positive, but means downward pressure to growth expectations - which in our view are too high to justify current levels, let alone to add to positions," wrote Spak.
In the latest round of cost-cutting measures, Tesla said last week that it would cut 7 percent of its workforce and discontinue production of some other models to focus on the Model 3. Musk also said that the company likely achieved a "tiny profit" in the fourth quarter.
"For years, Tesla sold the dream of transportation disruption and fantastic growth. This served the stock well turning Tesla into a top 6 (at times top 3) valuable auto OEM despite delivering a fraction of units of others and nary a profit," wrote Spak. "A stock should of course discount future cash flows and the market took the promises of Tesla and their future growth potential to justify lofty valuations while Tesla took capital needed to support their endeavors. But the rubber appears to be hitting the road as the realities of Tesla becoming a volume player, the challenges to scale and deliver high volume at high ASPs/margins are coming to a head."
RBC lowed its price target to $245 from $290. With Spak's rating change to underperform (the equivalent of a sell), there are now more analysts on Wall Street that say sell Tesla, than buy it. Eight analysts say "buy," seven say "hold" and nine now say "sell," according to TipRanks.com. It's rare for a stock as popular as Tesla to have a majority of analysts that say sell. The negative rating is still relatively rare, with most analysts typically using a "hold" rating to voice their displeasure with a stock. For comparison, Apple has zero sell ratings, according to TipRanks.
"Whether its cutting the price of their lineup by $2k/unit, admission the federal tax credit expiring will hurt, acknowledgment that Tesla can't sell at $35k Model 3 profitably and costs need to come down, or language around full-self driving - we'd classify recent commentary and actions by the company as more realistic," stated the RBC note. "This is likely to cause a review of model assumptions leading to negative expectation revisions."
— With reporting by Michael Bloom