Why Some Analysts Are Saying to Sell Tesla

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When Tesla Inc. (NASDAQ: TSLA) recently reported its most quarterly earnings, many investors were not impressed. In the past, analysts often have said to sell Tesla or at least not to buy into the hype. This company has been losing money for years, but for some reason its stock hit an all-time high last month. So who is right: the analysts who are telling investors not to buy the stock, or the Tesla fans?

24/7 Wall St. has included some highlights from the recent earnings report, as well as what some analysts are saying about the stock after the fact.

For the quarter, the electric car maker posted an adjusted diluted loss per share loss of $1.33 on revenues of $2.7 billion. In the same period a year ago, the company reported adjusted a net loss of $1.46 on revenues of $1.15 billion. First-quarter results also compare to consensus estimates of a per-share loss of $0.82 and $2.61 billion in revenues.

The carmaker delivered 25,051 vehicles in the quarter, up 9.9% sequentially. The company leased about 26% of those deliveries and expects to reacquire less than half the leased vehicles.

In its outlook statement, Tesla reiterated its 2017 production rate of 47,000 to 50,000 Model S and Model X vehicles combined in the first half of 2017, representing growth of 61% to 71% over the first half of last year. The company expects capital spending of “slightly over” $2 billion by the time production starts on the Model 3 in July.

David Tamberrino of Goldman Sachs maintained a Sell rating for Tesla but after the report increased the price target to $190 from $187. He cited a potential delay to the Model 3 launch curve, which means that Tesla would miss its production targets if that comes true. Goldman Sachs lowered estimates for 2017 to −$2.53 per share and lowered the 2018 estimate to a per-share profit $0.69. The firm’s 2019 estimate was lowered to $5.14 in earnings per share.

Separately, Merrill Lynch has had an Underperform rating for quite some time, although it had at least raised its target in the past up to $165. The view there is that either capital spending outlook or the timing of the Model 3 launch appears to be off. The company is spending less in capex to slow its burn rate.

The brokerage firm gave its investment rationale as follows:

We view Tesla as a trailblazer in the electric vehicle market, and believe it could ultimately be successful as demand for EVs increases. However, Tesla continues to burn accelerating levels of cash, while failing to turn a corner on profits and returns. Despite being a growing business in need of capital to fund its ambitious growth plans, we think investors may grow tired of supplying Tesla with incremental low-cost capital in perpetuity if investments fail to generate returns.

S&P CFRA’s equity rating was reiterated as Sell, citing this in the report:

Adjusted Q1 loss per share of $1.33 vs. $1.46 loss (prior note indicated EPS of $0.71), is wider than the $0.78 consensus loss estimate; Q1 revenues beat the consensus. In our initial impression, we note positive fundamentals including that the key Model 3 is poised to meet its July production start target, though we expect initial volume to be modest. Also, the increase in cash to $4B should be sufficient through the end of ’17; with gross margins up significantly. Ahead of PM analyst call, our view is TSLA is priced like it can do no wrong, but US automakers can do no right.

Shares of Tesla were last trading nearly 5% at $296.16 on Thursday, with a consensus analyst price target of $258.94 and a 52-week trading range of $178.19 to $327.66.