Tesla Inc (NASDAQ:TSLA) may produce high-performance cars but broker Jefferies expects the stock to under-perform.
In a note signalling the initiation of coverage of the electric car manufacturer, the broker says scaling up production is still the main challenge for Tesla.
“Achievements to-date and vision are impressive, but we don't think Tesla's vertically integrated business model can be scaled up as profitably and quickly as consensus thinks and valuation multiples imply,” Jefferies said.
Its discounted cash flow projections suggest a stock value of US$280, versus a current price of US$385.
Jefferies does not believe that Tesla can deliver the gross margins of 30-35% that one would expect from a vertically integrated business such as Tesla.
“This view is driven by the following factors: 1) product mix is declining faster than battery size and cost; 2) battery manufacturing is set to be at best a low-margin business given price deflation and material cost inflation; and 3) depreciation is catching up quickly,” the broker said.
READ: Tesla set to launch electric commercial truck in late October, says Elon Musk
Losses ahead?
It reckons the company will be loss-making until 2020, and notes that its loss per share forecast for 2019 of U$3.26 contrasts markedly with the median forecast of positive earnings per share of US$2.4 among analysts who cover the glamour stock.
“We find consensus too optimistic about depreciation, SG&A [admin & selling costs] compression matching the levels of disintegrated auto OEMs [original equipment manufacturers], interest expense and Tesla's ability to wean the market off Resale Value Guarantees. Tesla may, however, generate cash before earnings given the structure of leasing earnings and deferred revenue accounting,” the Jefferies number crunchers said.
On the plus side, Jefferies believes external competition is distant, but it is concerned about a herd mentality among the broking community when it comes to assessing the growth in demand, with the ever-present dangers of a rise in vehicle costs prompting a slump in vehicle sales and regulatory changes leading to delayed purchasing decisions.
Long story short, Tesla is enjoying the sort of valuation of what Jefferies calls “spiritual peers” like Amazon and Apple, but the difference is those companies feature capital-light business models with a return on investment capital that Tesla can only dream of with its current business model.