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Tesla Inc (TSLA): Is It Time for Bulls to Give Up the Fight?

Expert voices across the Street point to warning flags mounting around the TSLA narrative; here's why.


Let’s add another crack in the volatile narrative of electric auto empire Tesla Inc (NASDAQ:TSLA): Moody’s Investors Service chose to cut the company’s credit rating from B3 down to B2 last week.

This downgrade follows on back of cash burn challenges that have been plaguing CEO Elon Musk’s brainchild, as TSLA has fallen short of achieving Model 3 sedan product expectations. Make no mistake- Tesla could have a mega capital raise on its hands in the near future when taking into account a troublesome negative outlook.

Pressured by liquidity considering looming negative free cash flow coupled with maturities hanging up in the air above TSLA shares, the company’s $1.8 billion of senior unsecured notes have subsequently been slashed to Caa1- a mere seven steps away from a junk bond status.

Meanwhile, last Tuesday, Tesla already was confronting bad publicity from The National Transportation Safety Board’s crash investigation. After a semi-autonomous Tesla Model X Uber vehicle slammed into a freeway divider in California, where the car caught fire and the crash proved fatal for the driver, shares took a 12% beating in the market. What does this spell out for the bigger picture of self-driving vehicles?

Edward Jones investment strategist Kate Warne believes, “Even slowly rising interest rates could stress highly indebted companies” – especially as the price of what it means for companies like Tesla to borrow is starting to jump.

One expert on the Street sees a future where volatility takes wing. An era that has exhibited a “remarkable degree of consistency” in terms of the growth of global economies in the last 50 years will soon set.

“We expect the world to become less synchronized over the next year and at the same time the level of growth to fall,” Bernstein senior analyst and head of global quantitative and European equity strategy Inigo Fraser-Jenkins asserts, with a few words of wisdom for traders: “This does not make us bearish, but reduces the upside from here. Investors need to consider what happens next.”

“In short, the case for low leverage is that it is the part of Quality that is attractively valued and should perform well as credit spreads widen and yields rise,” adds the analyst.

Barclays analyst Brian Johnson sees the walls crumbling for bulls who have had “blue pillars of faith” for the empire: leadership in battery technology, ambitious autonomous goals, the Model 3 ramp, and footsteps into the energy arena.

Continuing to sound the alarm, the analyst maintains an Underweight rating on TSLA stock with a $210 price target, which implies a close to 19% downside from current levels. (To watch Johnson’s track record, click here)

“While we have always been in the doubting camp,” notes Johnson, “we believe the news flow over the last few weeks reveal further cracks in each of these ‘blue pill’ pillars of faith—albeit, we think the true ‘blue pillers’ are still holding firm in their views.”

Keep in mind, Johnson is alluding to the film The Matrix, where taking the red pill means staying in ‘Wonderland,’ learning the real truths at stake- but the blue pill means waking up from the story and cultivating your own sense of what that truth is. In this context, bulls have taken the ‘blue pill’ and are seeing what they want in a shaking TSLA story.

The “ball is in the ‘purple pill’ court,” as far as Johnson is concerned, who makes a bearish case as to why the reasons for bulls to back Tesla are cracking: “1. VW’s recent color on improving battery prices shows that even if Tesla maintains a lead in battery prices, that lead is narrowing—and could be more than compensated for by scale benefits at the legacy OEMs. 2. The Waymo/Jaguar partnership, combined with safety concerns post the recent Uber accident and fatal Tesla crash, reinforces that Tesla is behind in autonomous driving. 3. Whereas many expected Model 3 to provide Tesla with an ‘iPhone moment’ and make it a market share leader in auto, Tesla production missteps, combined with increased competition, make it tougher to reach that level. 4. Weak execution in auto, combined with little progress in autonomous and losses in Tesla Energy, make a tough case for success in ancillary businesses.”

Johnson spots one silver lining left for Tesla: the company’s production rate could still beat out lowered expectations for the first quarter of 2018. All the same, even investors who have bet long on TSLA shares could soon step “to the side,” warns the analyst.

Dana Hull of Bloomberg echoes with apprehension for a company facing an onslaught of negativity and worries: “The bar for the 1Q M3 production exit rate has been reduced into the print—we suspect likely now ~1,500-1,700 units/week, well below the 2,500 communicated back in Jan. Yet we think it’s possible Tesla may have stockpiled batteries amid Fremont downtime, allowing production to be higher in the final week of 1Q […] Yet even if Tesla can surpass the lowered bar, we see this of lower importance. Rather, we think the more important takeaway is that any M3 production number Tesla posts will likely be unsustainable, as it was reached either a) through an unsustainable production burst, or b), was achieved due to a temporarily high supply of batteries.”

Can Tesla ultimately rise above the escalating skepticism?

TipRanks indicates opinion on the Street hovers above TSLA shares with caution, yet positivity rings in the midst. Out of 22 analysts polled in the last 3 months, 5 are bullish on TSLA, 9 remain sidelined, while 8 are bearish on the stock. With an encouraging return potential of 14%, the stock’s consensus target price stands at $304.67, indicating the optimists still see hope for this electric auto empire just yet.