Here we go again.
That’s how some investors feel about Tesla (TSLA) after the electric car recently underwent a mass layoff and announced it cut production on its most expensive models, the Model S and Model X. These changes are just the most recent in Tesla’s ultimate pursuit of fulfilling its promise — mass-producing its Model 3 for the middle class. Tesla — which until recently has only marketed cars to high-income earners — does not want to be looked at as a company only for the rich, and needs to sell its affordable Model 3 in order to live up to its sky-high Wall Street valuation.
RBC Capital Markets analyst Joseph Spak is concerned by Tesla’s bumpy road ahead. The analyst has downgraded the stock from Sector Perform to Underperform, while cutting his price target to $245 (from $290), which implies about 15% downside for the stock. (To watch Spak’s track record, click here).
Spak says that “Tesla sold the dream of transportation disruption and fantastic growth…[which] served the stock well.” Essentially, the analyst believes investors have been betting on the future — that Tesla was the future of the auto industry. That’s why the company surpassed GM and Ford to become the US’ most valuable carmaker in 2018, even as the two century-old companies were still running circles around Tesla when it came to cars sold and revenue.
But Spak says the party is coming to an end: “The rubber appears to be hitting the road as the realities of Tesla becoming a volume player, the challenges to scale and deliver high volume at high ASPs/margins are coming to a head.” Tesla may be build tremendous cars and serve a niche (the luxury market), but Spak points out the company seems unable to do what it takes to sell a car for the masses, while operating a successful business.
One hurdle that Tesla is facing is pricing. Sure, Tesla hit production milestones in 2018 and seems to have a better grasp on making the actual car (which was a major concern). But when the federal tax credit for electric vehicles was cut in half on January 1st of this year, the company was forced to cut its vehicle prices by $2,000. This means $2,000 less revenue that they otherwise would have generated with the credit. In order to operate at a profit under these conditions, Spak says the company must decrease costs.
Overall, Wall Street doesn’t really know what to do about Tesla’s stock. TipRanks analysis of 24 analyst ratings show a Hold consensus, with 8 analysts recommending Buy, 7 Hold and 9 Sell. The 24 analysts’ average price target is $320.19, or 11.2% higher than current levels. (See TSLA’s price targets and analyst ratings on TipRanks)