Merrill Lynch Spins a Bearish Case on Tesla (TSLA)

Merrill Lynch's John Murphy notes Tesla would need to defy history with the quickest ramp for its Model 3 to meet 2018 delivery expectations.


Tesla Inc (NASDAQ:TSLA) has a cash burn issue that has one bear continuing to sound the alarm on the electric car giant’s first quarter financial results- results that sent shares on a roughly 6% stumble yesterday in the market.

Merrill Lynch analyst John Murphy puts it bluntly that the giant’s quarterly show was just “about as bad as consensus expected.” In reaction, the analyst reiterates an Underperform rating on TSLA with a $180 price target, which implies a 36% downside from current levels. (To watch Murphy’s track record, click here)

For the first quarter, TSLA posted a loss of ($3.35) in EPS, under even the bear’s expectations angling for ($2.75), yet ahead of Bloomberg consensus of ($3.41). Revenue reached $3.41 billion, just above the analyst’s $3.29 billion projection, considering less deliveries were offset by a bigger amount of vehicle sales that realized immediate revenue recognition. Gross margin of 13.4% underperformed the analyst’s 17.4% forecast, with the company’s Automotive segment circling expectations, but other segments experience weakness. Here, the sluggish Model 3 ramp comes into play, notes Murphy. Operating expenses hit $1.05 billion, over the analyst’s expectations of $1.02 billion. Tesla’s big problem of rising cash burn may lead to another capital raise, the analyst points out, considering the company’s cash burn for the quarter spiraled to approximately $1.04 billion. Even if the company aims for positive cash flow generation by the third and fourth quarter, Murphy stands concerned: “we have less confidence in the company’s ability to overcome current production challenges and generate positive earnings/cash at any point this year.”

“Easily,” Murphy predicts cash burn could rocket past $1 billion in the second quarter and “possibly more” as 2018 winds down, especially if the company underwhelms on its Model 3 production ramp. In this case, the analyst warns: “we believe a capital raise may be necessary or at least prudent.” Murphy predicts a $1 billion raise is coming at some point down the line in 2018 and odds are on equity.

“Outside of the results themselves, TSLA’s conference call was discouraging, in particular management’s dismissiveness regarding the ongoing production challenges of the Model 3, as well as the likelihood that the company may need to raise capital again. We believe this, in addition to deteriorating visibility over the timing of generating positive cash flow, could wear on investor patience, and impair TSLA’s key competitive advantage of access to low-cost capital necessary to fund the longer-term vision/plan,” warns the analyst, who adds that even “more important” than the quarterly print is the severe level of cash burn in the first quarter.

Murphy underscores, “The burden of proof remains” on this challenged tech giant to bring in “consistent organic free cash flow” and the analyst maintains CEO Elon Musk’s 500,000 unit yearly goal is way too ambitious for the short-term. There is pressure for the Model 3 to rise to the occasion, a production line that still confronts a slew of obstacles. The 2018 delivery target indicates Tesla would need to “more than triple” how many units are manufactured or sold through the course of the year, a number that would mean the company must deliver “the fastest ramp in its history.” Murphy concludes bearish as ever following first quarter earnings- and “a not so cool cash burn.”

TipRanks indicates sell-side analysts are split between the bulls and the bears on whether or not to take the volatile gamble on Tesla’s brand. Out of 21 analysts polled in the last 3 months, 5 are bullish on the electric auto empire, 9 remain sidelined, while 7 are bearish on the stock. Worthy of note, the 12-month average price target stands at $286.94, which aligns evenly with where the stock is currently trading.

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