While Tesla Motors Inc (NASDAQ:TSLA) and Netflix, Inc. (NASDAQ:NFLX) are often in the headlines, both are learning what it is like to be on a losing streak. While one analyst remains cautious on the stock in light of its controversial move to acquire Solar City, another analyst is bullish on Netflix amid stock weakness, pointing to a promising entry point.
Tesla Motors Inc
Tesla is still captivating the headlines with its recent announcement that it will be acquiring Solar City, leaving many investors nervous that a marriage between Elon Musk’s companies is not the best idea. Oppenheimer analyst Colin Rusch weighs in on Tesla as it moves to become a single company with Solar City.
Rusch explains that investors have several questions on what the combined company will look like, specifically from an “operational, governance, and finance perspective.” Though he believes that a successful integration is possible, he notes that it is “challenging and fraught with financing risks,” especially during this period of “higher capital market uncertainty as the finance industry digests the Brexit vote.”
The companies will need significant amounts of capital to successfully complete the merger. The analyst explains, “We believe a combined entity will face cash needs in four key areas: stationary power capex (primarily solar), auto capex, working capital, and operating lease obligations.” Rusch believes Tesla will expand its “ABL capacity to meet cash needs” while Solar City will rely on “a mix of securitization, tax equity sales, and outright system sales plus corporate debt.” Again, the analyst comments that this strategy is difficult, but achievable. At the end of the day, he foresees a total of $400 million in synergies through 2018, and well over $1 billion in synergies by 2020.
Rusch does not anticipate a shareholder vote to occur before Labor Day. He adds, “We believe this delay could complicate SCTY’s ability to refinance assets which could impact its current deployment schedule.” Once a firm offer is announced, he will listen for more detail on the acquisition.
With so much of the acquisition hanging in the air, Rusch maintains a Perform rating on Tesla and does not provide a price target.
According to TipRanks, 41% of analysts covering Tesla are bullish, 36% neutral, and 23% are bearish. The average 12-month price target for the stock is $267.26, marking a 27% potential upside from where shares last closed.
Netflix is down 20% year-to-date due to concerns surrounding subscriber levels, both domestically and internationally. Pacific Crest analyst Andy Hargreaves sees recent Netflix weakness and a good buying opportunity, noting that subscriber growth concerns are overblown.
Hargreaves addresses subscriber concerns, explaining, “Netflix’s aggressive shift to full global distribution has fueled uncertainty that is currently heightened by concerns about Q2 domestic subs and full-year international subs.” However, he explains these concerns are overblown because he has “seen nothing to suggest a material change in the pace of domestic sub growth, and… international sub growth will reaccelerate in Q3 following a Q2 that is likely impacted by seasonality and elevated churn following the global launch in Q1.”
The analyst comments that the estimate for 13 million new subscribers in 2016 is conservative as it “assumes the lowest level of incremental adoption on record in targeted markets” launched before 2016. While Netflix shares experience weakness as it continues to expand internationally, Hargreaves is confident that a “solid execution around the shift to full global distribution could drive NFLX significantly higher.”
Hargreaves reiterates an Overweight rating on Netflix with a $130 price target, marking a 42% upside from where shares last closed.
According to TipRanks, 64% of analysts covering Netflix are bullish, 28% are neutral, and 7% are bearish. The average 12-month price target between the analysts is $120.12, marking a 32% potential upside from where shares last closed.