Tesla (TSLA) Bears the Brunt of a Price Target Cut

RBC Capital's Joseph Spak now angles for just 4% in return potential for Tesla shares.

Tesla (NASDAQ:TSLA) offered reasons for investors to feel more reassured about its short-term prospects: an improved production pace picking up pace recently and news that neither debt nor equity will be required. Problems solved? Not quite, says RBC Capital analyst Joseph Spak, who paints a picture of longer-term fears haunting the tech giant.

In reaction, the analyst reiterates a Sector Perform rating on TSLA while dialing down the price from $380 to $305, which implies a 4% close to upside from current levels. (To watch Spak’s track record, click here)

After all, the electric car maker’s team released production numbers that underwhelmed a guide where expectations had already been substantially cut. Spak found himself wanting to think twice about his longer-term expectations, suddenly finding odds against them as “too aggressive.” This is a company that must begin achieving even some of its shorter-term targets in order for Spak to feel more confident in his longer-term expectations. Not only is Spak scaling back his estimates, but he likewise counts on other peers to likewise chop their assumptions in the forthcoming months. Ironically, though, this could prove positive for the stock, allowing expectations to suddenly be a) “more reasonable” and b) increasingly “achievable.”

Keep in mind, this is a stock that has suffered “intense” concerns from the market over Model 3 production among a slew of concerns from an Autopilot fatality-spurred investigation to a credit downgrade from Moody’s to a Model S recall. It is not out of left field that Tesla’s Model 3 deliveries of 8,180 massively underwhelmed the Street’s 11,092- at least not from where Spak is standing.

“We surely expect improvement, but we also believe the recent ~2k/week pace was a ‘surge’ result and thus its (near-term) sustainability is unclear. Management indicated they expect to produce 2k each of the Model S, X, and 3 in the next seven days in an attempt to show this level of production is sustainable,” notes Spak, who keeps an eagle on the pace as a key data point come Tesla’s first quarter print.

The analyst continues, “In many respects, the immediate question facing TSLA stock is: is (more than) doubling the current production rate from 2k/week to 5k/ week easier than doubling from 1k/week to 2k/week. But of course it doesn’t stop there with Tesla having much more grandiose end-of-decade volume goals (and Tesla Semi and solar+storage). Management has stated that future programs will have learned from Model 3, but Model 3 was also supposed to have learned from Model S/X. We don’t doubt that lessons have been learned, but making vehicles is hard and capital consuming.”

Regarding demand, the analyst is not blind to mounting competition in the electric vehicle arena, where the company may boast a stellar legacy, but its offerings do not fit neatly into “certain segments;” which matters in an arena where rivals are biting into segmentation strategy, warns Spak. For now, Tesla has 3 models to try to service demand for the whole market.

In a nutshell, “We recognize Tesla is difficult to value and prone to momentum and sentiment,” Spak contends, who believes much more needs to works over a long period of time before this stock is one worth the risk and volatility that comes along with a standout brand name.

TipRanks exhibits apprehension is the word on the Street for those surveying this electric auto empire. Out of 21 analysts polled in the last 3 months, 5 are bullish on TSLA stock, 9 remain sidelined, while 7 are bearish on the stock. Notably, the 12-month average price target stands at $294.27, which aligns evenly with where the stock is currently trading.

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