Shares of Tesla Inc. (NASDAQ: TSLA) have dropped about $40 from the 52-week high posted less than 10 days ago. That’s a 10% slide and analyst Toni Sacconaghi at Bernstein doesn’t think it’s over yet.
Bernstein reiterated its $265 12-month price target on the stock this morning, a figure that is 23% below last night’s closing price of $345.25 and a massive 43% below the 52-week high of $389.61.
Tesla’s problem, as far as Bernstein is concerned, boils down to how long investors are willing to put up no profits and no positive cash flow. CNBC cited Sacconaghi, who noted that Tesla will burn $4.7 billion in cash this year, raising its total cash burn to $10.6 billion since becoming a publicly traded company:
Tesla’s persistent cash burn has been a major investor controversy … In fact, Tesla may be the largest public company in history to have never generated either positive annual cash flow or positive annual profit.
What keeps Tesla going and keeps investors in the stock is it phenomenal share price growth. At their peak, share prices were up about 87% year over year, about 4 times better than the year-over-year performance of the Nasdaq Composite.
But if the share price even stalls, much less drops 23%, why would an investor stick around? There will be some, of course, who will buy the dip, but Tesla will have to deliver on its promised production and sale of its Model 3 sedan. Sacconaghi told CNBC:
[W]e worry about whether Tesla can successfully build the mass-market Model 3: (1) with good gross margins, (2) with good quality, and (3) on time. … We believe the essential issue with Tesla’s stock is not how much cash the company burns right now, but rather how well the company can execute upon its Model 3 launch – specifically around gross margins – and demonstrate that it has a clear path to long-term profitability.
Tesla stock traded traded up less than 0.1% in the early afternoon Wednesday at $345.24 in a 52-week range of $178.19 to $389.61. The consensus 12-month price target on the stock is $319.94.