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Stocks  | October 10, 2019

  • Recently, Tesla has been one of the most polarizing stocks. Investors have strong views on both sides of the divide—bearish and bullish.
  • Wedbush Securities downgraded the stock to “neutral” earlier this year and reaffirmed its rating. Brokerages classify stocks as a “buy,” “sell,” and “hold.” However, when it comes to Tesla, it’s tough to be neutral.

Wedbush on Tesla

Wedbush Securities reaffirmed its “neutral” stance on Tesla (TSLA) stock. Notably, Wedbush was a Tesla bull for a long time. However, Wedbush changed its opinion earlier this year. The stock has fallen in 2019. So far, the stock has underperformed the S&P 500 (SPY). The company’s returns have also lagged mainstream automakers like Ford (F) and General Motors (GM) in 2019.

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Analysts’ Ratings

Looking at Tesla’s consolidated ratings, it received a “buy” or higher rating from 11 analysts. Meanwhile, 13 analysts recommended a “sell” or lower rating. Ten analysts surveyed by Thomson Reuters recommended a “hold” or equivalent rating. Tesla’s overall rating score is 2.94, which is equivalent to a “hold.” The stock’s mean consensus target price of $248.01 represents a potential upside of 3.3% over its closing price on Tuesday. So, analysts are “neutral” on the stock from a rating and target price perspective. However, not many investors would be convinced that the company is a “hold.”

Dan Ives, Wedbush Securities’ managing director of equity research pointed out very pertinent issues for Tesla. The company needs to prove that Model 3 demand is sustainable. Also, Tesla needs to make profits even by selling the lower margin Model 3. Finally, the company could get dragged in the US-China trade war, which is a potential risk.

Tesla’s Risks And Opportunities

While markets expected subdued deliveries in the third quarter, Tesla surprised with another quarter of record deliveries. The company still fell short of Elon Musk’s target for 100,000 deliveries. The company’s third-quarter deliveries were much better than analysts’ expectations.

We might get some more updates during the company’s third-quarter earnings call. There are concerns that Model 3 demand is plateauing in the US. Growth in international markets might have fueled the delivery growth this year.

Profitability Conundrum

We also need to consider profitability. While Tesla bulls would point to rising deliveries, the company has to be a sustainable venture. Just four quarters of profits over the last decade doesn’t provide a lot of fodder to short-sellers and bears. We have a hard time valuing the stock due to a lack of sustainable profitability.

Show Me The Money!

How much money Tesla can make on each car or how much incremental earnings it can derive from software updates is still a mystery for markets. The company’s market capitalization is higher than Ford’s. Although Tesla’s market capitalization is lower than General Motors, Ford and General Motors sell more cars than Tesla. Their sustainable businesses are making profits and paying dividends to investors. While investors wouldn’t exactly expect a dividend from Tesla, it still needs to address the profitability conundrum.

China Question

China is a potential wild card for Tesla. The country is the largest electric vehicle market. The company’s China Gigafactory is scheduled to begin mass production this month. Despite the trade war, China exempted several Tesla models from the purchase tax last month. However, given the recent escalation in the US-China trade war and uncertainty about US-China relations, China will continue to be a wild card for the company.

You can’t deny that Tesla’s overall value proposition is good as a product. However, the company needs to convince markets that it can convert a good product into a sustainably profitable venture.

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