Goldman Downgrades Tesla To "Sell" On Cash And Execution Risk

Tyler Durden's picture

The recent avalanche of bad news for Tesla has refused to stop this morning, when former Tesla cheerleader, Goldman Sachs analyst David Tamberrino, announced he was cutting the company's stock rating to "Sell", slashing his price target to $185, and predicting 28% downside from current prices. TSLA stock was down -2.3% in premarket trading on the Goldman report.

As Tamberrino explains, "we downgrade shares of Tesla to Sell from Neutral with 28% downside to our 6-month price target of $185 (lowered from $190), vs. 8% downside for our coverage. While we believe Tesla currently has a lead relative to OEM peers with respect to vehicle technology adoption, electric vehicle architecture, and (potentially) battery scale, our concerns are more near-term oriented with respect to operational execution on the Model 3 launch, an unproven solar business, and cash needs. Ultimately we see a delayed launch (pushing volume growth out and to the right) and FCF burn rate (necessitating a capital raise before 4Q17) to weigh on TSLA’s shares."

Some additional details why Tamberrino changed his opinion (aside, perhaps, from the immediate lack of more secondary offerings on which Goldman can be lead underwriter):

We downgrade shares of Tesla from Neutral to Sell with 28% downside to our 6-month price target of $185. We expect to see pressure on shares as we progress through the year, as cash burn intensifies and the ramp of Model 3 volumes proves to be slower and flatter than assumed in guidance/consensus. Further, the acquisition of SolarCity – which is undergoing its own business model transition – comes at a time when we believe Tesla should be singularly focused on becoming a mass automobile manufacturer. Lastly, while we see Tesla as a net beneficiary of potential tax reform, we believe the net present value of those benefits would remain effectively unchanged from the current tax system given the increased time it would require to utilize increased NOLs. Our key concerns are as follows:

  • Model 3: Launch curve a concern, operating margin dilutive at current cost, and reservation conversion may be hindered by higher selling prices. We believe the Model 3 will have a more subdued launch curve than the company is targeting as some suppliers have expressed concern around final designs not being locked down. As a result, we expect the company to achieve mass market volumes (i.e., above 100k annualized run-rate) in 4Q18 vs. Tesla’s target of 4Q17.
  • SolarCity business model unproven and acquisition comes at a pivotal point in Automotive product cycle. We believe the recent acquisition of SolarCity increased the risk profile of Tesla amidst a business model transition – from company-owned equipment installation and lease/PPA contracts to customer purchased equipment on cash/loan sales – and provides limited synergies. Ultimately, the acquisition raised the net leverage of Tesla while creating EBITDA and FCF drag that requires incremental non-recourse debt to be raised.
  • Capex ramping significantly, driving incremental capital raise: We forecast a significant increase in near-term capex levels required to bring both the Fremont, CA factory and TSLA’s gigafactory to scale. Overall this drives our forecast for $3bn of automotive capex in 2017 and FCF burn of $2.8bn in 2017. Ultimately we see another equity raise needed before 4Q17. This is further exacerbated by the addition of SolarCity, whose business would continue to be a FCF drag and requires an equal amount of sale of project level debt and tax equity financing to maintain cash balances.
  • Potential tax benefits significant, but would be recognized over a longer period of time – driving net present value lower. While we would expect TSLA to be a net beneficiary of potential US tax changes (i.e., scenario including destination-based tax with border adjustment as well as full capex expensing and elimination of net interest expense) and forecast its NOLs to grow under a potential tax change scenario, based on our model we find that the net present value of these higher NOLs is slightly worse than the status quo given a longer time period to achieve (the company is not currently a cash tax payer and a lower corporate tax rate would push out recognition of NOL benefits).
  • Estimates now include SolarCity; we are well below the Street: We update our 2017 through 2020 estimates following 4Q16 results and further layer on our SolarCity forecast. Overall, our EBITDA estimates fall by an average 12% (SolarCity inclusion, lower Automotive gross margin, pushed out Tesla Energy volume ramp) and are on average approx. 30% below the Street.

Goldman then explains "what would make us more positive?" andnoes the following:

We would become more positive on the stock if the company were able to demonstrate improved manufacturing execution by driving more rapid quarterly production growth in its current vehicle offerings than we model, demonstrate key milestones implying its Model 3 launch remains on track for mass volume in 2H17, drive down the cost of its battery packs faster than expected, demonstrate considerable market demand for the cross-selling between Tesla products and SolarCity products, and deploy capital more efficiently – driving reduced incremental capital requirements.

Unwilling to disappoint the Tesla fanatics, of which Goldman itself was a member until recently, the bank offers the following "quick word to the Tesla bulls"

We continue to view Tesla as a disruptor in the electric vehicle and alternative energy segments – with a clear lead relative to its peers with respect to vehicle technology adoption (increasing advanced driver assist features, revolutionary over-the-air update capabilities, infotainment capabilities, and general consumer-desired features), electric vehicle architecture, and (potentially) battery scale with the build-out  of its gigafactory. However, over time we do not see competitive barriers to entry (other than ease of raising capital and achievement of scale) that traditional OEMs, new entrants into the space, and other battery manufacturers could not duplicate. As a result while we do believe the company has at least one product cycle lead on its competitors, there ultimately could be a Samsung to this Apple (think smartphones), with incremental competition on the horizon as we have detailed in past reports. That being said, this is still an unprofitable Apple at present and pushing growth out and to the right would drive present value down. With that as a backdrop, we see valuation as appropriate at $185, and anticipate downside to shares as we progress through what we believe will be a choppy Model 3 launch that is slower than anticipated.

Some more valuation observations:

  • Share move opens entry point: Since 12/2/16, TSLA shares have risen 42% (vs. S&P500 +8% and Auto coverage average +9%) driven by a mixture of positive news flow (potential beneficiary from tax proposals, gigafactory investor tour, Model 3 pre-production). However, fundamental operations have not exhibited a material improvement and we estimate potential tax benefits are a wash looking at the net present value of NOLs generated.
  • Operational execution still unproven: We see room for shares to de-rate as the Model 3 production launch likely disappoints and as an unproven SolarCity business model likely weighs on the company’s focus/results.
  • Capex ramping, see capital raise in 3Q17: We forecast $3bn of automotive capex in 2017 and FCF burn of $2.8bn, necessitating a $1.7bn equity raise.
  • Valuation: Our 6-month price target becomes $185 (from $190), now adding SolarCity ($9) to Tesla Energy ($31 from $34 on slower ramp) and probability-weighted automotive segment ($145 from $156 on lower margins) valuations.
  • Key risks: Stronger Model S/Model X demand and/or production, positive free cash flow generation, and incremental new product announcements

Finally, and perhaps most amusing, is Goldman's rendition of what the bank calls Tesla's "hype cycle"

Trading the TSLA hype cycle: TSLA shares have mostly traded in a $180 to $280 range over the past couple years (Exhibit 1), and we again see room for downside toward the bottom of this band. Historically, (1) the stock takes an average 3 months to move significantly higher driven by “hype” around incremental product launches, new business lines, and delivery growth is priced in; (2) post these runs, TSLA takes approx. 7 months to de-rate as launches are pushed out, deliveries miss expectations, and gross margin percentage disappoints. This has occurred three times over the past three years. And as laid out above, we believe the drivers behind the most recent stock surge (beneficiary of potential tax changes, Model 3 launch/delivery timing, and gigafactory investor tour) are baking in benefits that will take longer to materialize and we expect the stock to de-rate as a result.

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Infinite QE's picture

God's teeth man. Call Obama, he must save Tesla!

Erek's picture

If Goldman is telling everyone to sell who is buying?

tuetenueggel's picture

If any zionist bankster tells to sell, go and buy.

You never can make a better deal.

But watch out. the opposite is just the same. Sell, when they say buy.

At once.

tuetenueggel's picture

Taxpayer will save Tesla - Musk.

It´s a religious movenemnt solar industriy not a scientific rooted one.

Greens shit the same stinky turds and we shall pay their cleaning costs........

Catullus's picture

It's SolarCity. Those solar businesses are DISASTERS. Think borrowing money for 7 years to build something on someone's house that pays back in 15-17 years. Oh, and they depreciate.

STAY AWAY

-- Person who got fucking burned on SunEdison

youarelost's picture

Solar City is in bed with Tom Wolf in PA. He created a program to install solar panels on houses.  Solar City does the installs and get all the extra power. You get "free electric". Except they forget to tell you the panels are paid for by the tax payers.  A sales person came knocking at my dorr to sell this crap. I told him to get the fuck off my property and stuff his socialist solar panels up his ass.

  They sold to 1 house and they look like crap on the roof.

tuetenueggel's picture

Mybe you and me are the only ones to understand that a complete industry tries to fuck mankind.

Sorry solarmorons, not with me and never. Stupidity is no gen defect, but simply lack of brain.

Ban KKiller's picture

Leasing solar is a nonsense idea. Owning is far better with the thirty percent tax credit still available. Average payback is ten years then it's all gravy...IF you own the system. Or just enjoy the five percent per year energy price increase while wishing you had purchased solar. Big solar is in the finance business, hence all the leasing bullshit. Solar companies that are massively in debt must be avoided. See Sun Edison...that one was obvious!

Iconoclast's picture

IPO price was $17, that's where this clusterfuck is headed.

tuetenueggel's picture

Could it be, that the holy GRAL of leftish green assmongols starts heavily rusting ?

Never ever.

Disgruntled Goat's picture

Sorry, wonder boy. 

Now can we cut all the government subsidies that this guy is getting?

orangegeek's picture

Interesting what happens when there's no more handouts from big fat fucking goobmint.

 

But that's all right - yellen will have this piece of shit bid by noon.

 

Downgrades are bullish!!

south40_dreams's picture

This company has a broken business model. Oh, I'm sure it's different this time

whensteamedapumpkinwillfart's picture

tell you what. just cant beat quality. mmm warranty.

 

Anopheles's picture

Why don't they put the economic data into meaningful terms?   Oh, right, then idiot investors would catch on to what's really happening.  

That's why you never hear the truth, such as:  Tesla LOST $45,000 for EVERY car they produced last quarter (year).

Oh yeah, they'll make it up on volume.....  

What a way to run a business.  If only Delorian was so lucky to have perpetual, unlimited losses, he'd still be around. 

roddy6667's picture

Tesla buys a solar company that is bleeding millions and is heading for bankruptcy.

Tesla launches a lower cost, lower margin vehicle despite the fact that they are losing money on a high-margin luxury vehicle.

Tesla builds a battery factory that uses Li-Ion batteries, a 20 year old technology. That's like building a buggy whip factory when Heny Ford is building his first big car factory.

Tesla has never made a dime in profit since they opened in 2003. We are talking real money, calculated with GAAP, not the Bernie Madoff accounting system Tesla uses.

People are shocked when the stock price goes down?

 

Arnold's picture

Musk uses failing company to buy his failed company.

 

http://www.zerohedge.com/news/2013-05-08/elon-musks-solarcity-sues-gover...

http://newsvader.com/id/16231905432

http://www.zerohedge.com/news/2016-05-10/five-reasons-why-pain-solarcity...

So looks like Musk is bailing himself out his SCTY equity (where he is the largest shareholder) with richly priced TSLA stock (of which he is also the largest shareholder).

http://www.zerohedge.com/news/2016-06-21/musknado-tesla-tumbles-after-of...

Ink Pusher's picture

" So looks like Musk is bailing himself out his SCTY equity (where he is the largest shareholder)"

 

Unlike the fucking thieving lying banksters who get bailed out on OUR DIME !

Musk is a businessman with an ethic as opposed to the scumbag motherfuckers that just downgraded his stock.

Goldman is protecting a dying oil and gas market.

By shitting all over solar electricity and other alt energy .Simple as that.

 



roddy6667's picture

Mr. Musk's actions demonstrate that he is NOT a businessman with an ethic. He is the poster boy for corporate welfare. The deal with SCTY is as corrupt as it gets. Where is the SEC? Oh, wait. He is part of the gang that lives off the taxpayers. I forgot.

Anopheles's picture

Teslas battery packs for their cars are based on using 7,000 of the cheapest commodity batteries available, the 18650 size lithium battery.  As you mention, nothing high tech at all. 

Those batteries are EXACTLY the same as power every cordless power tool.  18V is a 5 (or 10 for high capacity) cell battery pack of 18650 cells.  His cars just use 7,000 of the same cells.

Their "low cost" Model 3?   Musk has already said publically that it will actuall sell for $45k to 50k.  The $35k version is completely stripped down with a tiny battery pack.   They will probably only make a dozen of those cheap versions, just to say they actually produced a $35k car.

 

roadhazard's picture

Elon Musk is the only one trying to move America forward. No good deed goes unpunished.

ThunderStruck's picture

TSLA is just anotjer pig wearing a tuxedo.

Ink Pusher's picture

My bet; you are working in the mail-room at Goldman Sachs.

Ink Pusher's picture

After reading this story Goldman now will get the same level of respect I give Gartman.

A Big Fat ZERO.

 

malek's picture

"Tesla [...] becoming a mass automobile manufacturer"

Muaaahahahaha!!
My sides, my sides!

IronForge's picture

Too Late.  HMC and TMC have already begun rolling out their HFCVs.  Their Partners (GM, F) will be rolling theirs out soon.

People can drive HFCVs from SAN to SFO. 

Add in longer Battery-ranged Volt, PHEVs, and BEVs like Bolt (HMC will have PHEV/BEV versions of their HFCV), TSLAs days of "hype and innovation" are numbered.