Tesla story 'broken?' Analysts cut their price targets on the electric car maker after disappointing third-quarter earnings

Published Thu, Oct 19 20236:48 AM EDT

Wall Street analysts weren't too optimistic heading into Tesla 's third-quarter earnings — and the company's downbeat results is keeping them on the sidelines. The electric vehicle maker missed on both earnings and revenue for the first time since the second quarter of 2019. CEO Elon Musk tempered investors' expectations for the soon-to-be launched Cybertruck, emphasizing that it likely will not create significant positive cash flow for at least 12 months after production starts. The company also emphasized high interest rates are pressuring affordability. Shares declined 5% during premarket trading Thursday on the back of those results and commentary. As of Wednesday's close, the stock has rallied 97% year to date, but fallen from its 2023 highs in recent weeks. TSLA 1D mountain Tesla shares Many analysts covering Tesla had already forecast margin pressures due to lagging sales and just reiterated their ratings on the company's shares following Wednesday's release. However, several firms further reduced their price targets. Many had already lowered their price targets ahead of the earnings announcement. Goldman Sachs reduced its price target to $235 from $265, which implies 3.2% downside. It maintained its neutral rating on the stock. "We believe the 3Q report will add to near-to-intermediate term investor concerns given company commentary that the current macro backdrop/higher rates could gate its growth (including how quickly it ramps factories), and comments that the initial Cybertruck ramp could be slow (due to the quantity of new features and technologies Tesla will be using, not due to demand with > 1 mn reservations)," analyst Mark Delaney wrote in a Wednesday client note. To be sure, Delaney is more upbeat on Tesla' long-term growth prospects due to its leading position in the electric vehicle sector and clean energy markets. Toni Sacconaghi of Bernstein still has a more dour view on Tesla all around. He reiterated his underperform rating and $150 price target on shares, which implies 38% downside from Wednesday's close. "5% auto revenue growth, collapsing margins and trading at 200x FCF — is the story broken?" the analyst wrote in a Thursday note. "In many ways, Tesla is increasingly looking like a regular auto company." He added that commentary on its earnings call raised even more concerns, as Musk expressed hesitancy on the prospects for Tesla's new Mexico manufacturing facility — which is expected to be the primary factory for its affordable Model 2. Wells Fargo and Jefferies both have their price targets at $250 on shares, which suggests just a 3% rise from where shares closed on Wednesday. "No more rose-colored glasses," Wells Fargo analyst Colin Langan wrote in a Wednesday note. Langan expects the company's margins to remain under pressure, as well as unclear volume outlook due to Musk's Cybertruck and Mexico plant commentary. Langan maintained his equal weight rating on shares. Jefferies analyst Phillippe Houchois also kept his hold rating. He said that despite a "solid" sequential reduction in unit cost of goods sold, "every other metric [came] in slightly worse." Citi, meanwhile, said it prefers to stay on the sidelines until a more convincing entry point with near-term fundamental catalysts appears. The bank reiterated its neutral rating, while bringing down its price target to $255 from $271. The new price target implies 5.1% upside potential. The prevailing sentiment in the U.S. electric vehicle market is "decisively negative on the view that Tesla's price cuts haven't unlocked significant demand and have made it more difficult for competitors to successfully ramp EVs," analyst Itay Michaeli wrote in a note on Thursday. "We suspect Tesla's Q3 results will worsen this sentiment, but we see several unique factors (structural density, regional, product, IRA) that argue for the broader U.S. EV market performing better vs. prevailing sentiment over the next 12-24 months," Michaeli added. 'How can we remain overweight?' Even Morgan Stanley's Adam Jonas trimmed his price target to $380 from $400, though the new forecast still implies more than 56% upside. Jonas also has a top pick designation on Tesla. Jonas expressed awareness of his outlier position on the Street. "How can we remain OW Tesla following these negative revisions and how can we defend a 'growth' stock that appears ready to enter its 2nd consecutive year of earnings decline?" he wrote in a Thursday note. He answered his own question: "In our opinion, Tesla is much more than an auto company. Of course, Tesla is an auto company and we believe it will be for many years to come. But out of our $380 price target, our valuation of the 'core' auto business is $86/ share, leaving 77% of our target derived by Network Services, Mobility, 3rd- Party battery/FSD licensing, Energy and Insurance." He added that his overweight thesis is "highly dependent" upon these business lines becoming greater drivers of earnings. Jonas also expects a broader range of new products by the 2026 fiscal year, and cited Tesla's "compelling" long-term free cash flow growth potential. "While it's important to factor in near-term/real-time headwinds into FY24, we feel it is also important and reasonable to consider the long-term potential of the products and services being commercialized by the company," Jonas said. — CNBC's Michael Bloom contributed to this report.