In the days following Q2, things seemed to be going better than ever for Tesla (NASDAQ:TSLA). The electric auto giant had just announced the achievement of its Model 3 production goal, while it maintained adequate Model S and X production and watched the waitlists for all of these vehicles grow. It didn’t take long, however, for reports of foregone brake tests and unstable binge-building to flip the switch on the public’s opinion of the company. Even though Tesla’s stock is currently 16% lower than its record price in June 2017, many still consider it overvalued.
Needham analyst Rajvindra Gill, ranked #29 of a total 4,840 TipRanks analysts, fits right in with the skeptical crowd. Ensuing the unfortunate truths released about the company and looking at its future potential, Gill lowered his rating from Hold to Sell.
Tesla is investing so much into the Model 3, but for what? According to Gill, order cancellations are coming in hotter than ever. Regardless of the reason why—from delayed waiting times, to the unavailability of the original $35,000 design, to the expiration of the $7,500 tax credit—refunds have officially outpaced deposits. Last August, the refund rate was marked at 12%, which Gill estimates has more than doubled since then. As it has become increasingly difficult for consumers to bear the 4-12 month waiting period for the base model, the analyst maintains that the drop off in demand should come as no surprise. Gill is especially concerned with the fact that an entire third of TSLA’s cash holdings were customer deposits, which continue to decrease.
At a certain level of demand, gross margins can only go so far. Not only does this curse plague the Model 3, but it haunts Models S and X and well. Relative to 1H17, S and X sales dropped 6.3% in 1H18, which accounted for only 44,100 models altogether. In turn, Gill has lowered his 2019 full year estimates of 54,000 S’s and 56,300 X’s to merely 50,200 S’s and 49,200 X’s. Model S deliveries alone have declined in two consecutive quarters, and as Tesla proceeds with its Model 3 production, the analyst expects this trend to persist and spread its wings over the Model X as well.
Tesla has failed to meet Needham’s expectations of sales and deliveries for each of its three available models, and Gill is no less suspicious of the company’s future. In addition to slower production and fewer sales, the analyst also envisions TSLA struggling in managing its Zero Emission Vehicle (ZEV) credits. As only more electric vehicles hit the roads, the number of ZEV credits Tesla can sell will decline. Gill estimates that Toyota, TSLA’s largest buyer of ZEV credits, will need a maximum of 55,000 credits come 2020; however, the analyst also predicts Tesla will generate over 700,000 of these credits the same year. With supply so much greater than demand, the electric auto giant will be left with an overload of credits, which will fall in value as a result. The past nor the future is doing Tesla any justice, and it yet again looks as if the company may not be able to break even by the end of 2H18.
TipRanks exhibits a slightly more hopeful Hold consensus on TSLA. Of the 23 Wall Street analysts surveyed in the last three months, 8 are bullish, 7 are sidelined, and 8 are bearish on the stock. With a slight downside potential, TSLA’s 12-month average target price stands at $312.82.