Tesla Inc.’s (TSLA.O) current valuation already considers overly lofty expectations, with at least one-third of the share price reflecting an “Elon premium,” RBC Capital Markets analyst Joseph Spak wrote in a note to clients.
Spak downgraded Tesla to underperform from sector perform, saying the challenges of the scaling up and delivering a large volume of cars at high prices and margins are coming to a head. The analyst also lowered his price target on the stock to US$245 from US$290.
“Given 2019 deliveries are likely to be close to fourth-quarter 2018 run-rate, but with a price/mix headwind, third-quarter 2018 may have been peak profitability this decade,” Spak said. The company’s recent decision to lower the prices of its cars by US$2,000 to offset the effect of a gradually phasing out federal tax incentive confirmed RBC’s view that the bulk of demand is at a lower price point that Tesla can’t yet access profitably.
Tesla plans to report fourth-quarter results on Jan. 30. Last week, the company said it had managed to eke out a profit in the final three months of 2018, even as it warned of a “difficult” road ahead.
RBC also writes:
- Commentary from Tesla’s recent 8-K suggests the company is now, or soon, fulfilling the high-end demand in Europe and Asia
- However, the recent cutting of the workforce by 7 per cent and commentary focused on reducing costs in the 8-K implies the bulk of the backlog, and indeed the bulk of demand, lies at the lower price-points
- “While the strategy of fulfilling the high end to bring cost down for the low end had good intentions, we believe Tesla underestimated the cost curves and manufacturing side of the equation”; Spak notes that 34 months after Tesla offering the promise of a US$35,000 Model 3, the car still does not exist and Tesla admits they can’t make it profitably
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