One day after Tesla announced its worst quarter in history, in which it burned a record $1.4 billion in cash…
… Goldman has guaranteed it will not be an underwriter on the next Tesla stock offering – which at the current cash burn will take place in less than 2 quarter – by reiterating its Sell rating on Tesla, and cutting its Price Target to $205, or 36% downside. Here is the summary from Goldman’s David Tamberrino who once again unapologetically throws up all over the latest TSLA earnings:
We reiterate our Sell rating on shares of TSLA. We believe the stock should continue to de-rate following 3Q17 results where the company further pushed out its Model 3 production targets for 5k/week to late 1Q18. We believe this further pushes out the potential to ramp to 10k/week production of the Model 3 to at least 2019 (though we continue to model a ramp well below both); this should weigh on gross margins through at least 1Q18 and we do not expect a return to above 20% Automotive gross margin levels until 2H18. Altogether, we believe this indicates that the company’s goal for positive OCF generation should remain elusive until the middle of 2018 — though we still forecast significant FCF burn. On that front, we now believe TSLA will need to raise capital sooner (2Q18 vs. 3Q18 previously). Lastly, we believe the company’s comments on potential China production (3 years out) will be disappointing to investors, which have been confident in TSLA entering the China market with local production in the next one to two years. Our 6-month price target declines to $205, showing 36% downside.
And some more details:
3Q17 results weaker than expected, Model 3 production targets pushed out
TSLA reported a weaker than expected quarter, with an adjusted EBITDA loss of $22mn vs. GSe of $145mn and FactSet consensus of $175mn. Overall, higher operating expenses than expected drove the miss. More importantly, the company pushed out expectations for its 5k/week production target for the Model 3. Altogether, we lower our estimates and believe that Street consensus figures similarly need to be tempered given lower gross margin guidance and a pushed out cadence to Model 3 production.
Key points — to the negative:
- Model 3 production target for 5k/week has been pushed out to late 1Q18: Previously the company had targeted late 4Q17, and appeared about one month behind in October when it announced 3Q17 deliveries. However, due to battery pack module issues, this ramp appears pushed out further to the end of 1Q18. That said, the company believes it can exit 4Q17 above 1k/week in production (with comments suggesting potential to be in the 1,000s per week production range).
- 10k/week Model 3 production now looks pushed to 2019: While this is very much undetermined – as the company needs to get to 5k/week before it can determine where to add capital in order to speed up or duplicate its lines, we believe the company has softly pushed its 10k/week production target into 2019 from “at some point in 2018” previously.
- New product cadence could be pushed out: The company has previously communicated that new product development costs are largely contingent upon internal cash generation from the Model 3. Future product launches include (1) the Tesla Semi (reveal date of 11/16), (2) the Model Y –a crossover based on the Model 3 platform, (3) a pickup truck, and (4) the second generation roadster. We see the timeline for these products as likely pushed out as (1) the Model 3 remains a drag on cash flow generation from a slower ramp, and (2) the company allocates resources on ramping Model 3 production.
- Automotive gross margin guidance lowered to approx. 15% in 4Q17: As a result of the production ramp issues, the company has now set a guide of 15% gross margins in 4Q17 – previously we had forecast 16.8% in 4Q17 and consensus was at 19.4%; on our new estimates, we see Automotive gross margins at 13% in 4Q17. Additionally, the company expects that margins will improve sequentially in 1Q18 with (1) the Model 3 achieving breakeven at the end of 4Q17, and (2) improvements to Model S/X margins. We see sub-20% margins continuing until 3Q18 on a slower production ramp (our volumes remain unchanged from the previous forecast). Energy storage and generation: 4Q17 revenue is expected to n be roughly flat with 3Q17 levels, implying $317.5mn vs. our $471mn, as declines at SolarCity are expected to be offset by increases at Tesla Energy. As result, the company expects gross margin to decline sequentially due to the higher mix of Tesla Energy revenue.
- Initial guidance for 2018 capex to be flat yoy: We had previously expected a step down of approx. $1bn (from $4bn in 2017 to $3bn in 2018) given Model 3 / gigafactory capex spend in 2017 coming down. To the positive, this means the company sees further growth opportunities and is looking to deploy capital in order to drive revenue; however, when combined with the exacerbated cash burn from lower for longer gross margins, we now see a capital raise in 2Q18 (previously 3Q18).
- Model S / X production capped by supplier: TSLA noted that its Model S and Model X production is likely constrained at the 100k level given it is sole sourcing its 18650 batteries from Panasonic; at present, TSLA and its partner have not determined if they will deploy more capital to increase capacity.
- Investor expectations for China should be tempered: The company noted that it would likely begin to spend capex to build out capacity in China in 2019, and noted first production in the region would be around three years from now (i.e., 2020). We believe investors were looking for a more rapid deployment of capital and scaling of production. As a result, we think some of the assumed medium-term growth should be tempered.
Updating estimates — still well below consensus
We lower our 2017-2019 adjusted EBITDA estimates to $500mn/$1,569mn/$2,833 from $871mn/$1,749mn/$2,961 previously to reflect (1) lower Model S/X margins, (2) continued Model 3 margin dilution, and (3) increased operating expenses as the company ramps its sales organization. Our updated estimates are an average 38% below current Street consensus (before the print) and believe estimates need to come down given the slower ramp to Model 3, gross margin headwinds, and higher opex.
We are Sell-rated on TSLA shares. We decrease our 6-month price target to $205 (from $210), as our probability-weighted Automotive segment valuation declines to $171 (from $176) on lower margins and higher capex, and our SolarCity ($4) and Tesla Energy ($30) segment valuation are unchanged.
Meanwhile, even as stormy weather gathers in longsville…
Stormy weather in Shortville …
— Elon Musk (@elonmusk) April 3, 2017
… and the stock tumbles, there is a long way to fall for Tesla before it hits Goldman’s $205 price target.
In the meantime, Tesla Bonds are crashing too.
Time for Musk to unveil his time-travel plans…
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