Tesla Inc. stock was downgraded to sell from hold by Cascend Securities on Tuesday on signs that customer demand for the mass-market sedan, the Model 3, is beginning to flag as the company grapples with production issues.
Cascend’s Chief Investment Strategist Eric Ross said new customers who have not already preordered the Model 3 are realizing that they can’t get new vehicles until 2019, and are starting to look elsewhere. The electric-car field is growing, with all the major car makers working on their own models, he said. Ford Motor Co.
alone has 13 electric vehicles planned for release in the next five years.
Meanwhile, “the company is burning through cash and will likely need to raise capital in the first half of 2018 (and perhaps even the first quarter 2018),” Ross wrote in a note. “And there won’t be enough Model 3 production to suggest break-even is around the corner.”
To be sure, there are positives to report on Tesla, including its “great, exciting brand to which consumers are drawn,” said the note. And some major economies, including China, the U.K., France and Norway have banned the future production of vehicles powered by fossil fuels, a boost for electric-carmakers.
Cascend downgraded Tesla
to sell on June 16, when the stock was trading at $371, and then upgraded it to hold on July 17, when it had fallen to $319. The stock then rose above $385 in September, ‘but we weren’t nimble enough to make that trade,’ said Ross. His new $250 stock price target “is back to where the stock was when the Model 3 was announced, but not yet meaningfully on the horizon,’ he said.
As the chart illustrates, demand rose sharply ahead of the Model 3 launch, but is now moving down on a quarter-on-quarter basis. “We are concerned that Tesla (with all its buzz) will lose customers to competitors because they can’t manufacture enough vehicles,” said Ross.
Tesla Chief Executive Elon Musk said on the company’s third-quarter earnings call that he expects to achieve a production rate of 5,000 Model 3 vehicles a week by late in the first quarter, adding he had “zero concern” about a production goal of 10,000 a week at some point in 2018, although he was unwilling to name a date.
But the company’s production issues may lie beyond just the known battery issues and have more to do with their integration into the Model 3. Meanwhile, Tesla’s junk bond rating could be downgraded if it fails to meet its goal of 300,000 units being produced in 2018.
Tesla and Musk may simply have too many balls in the air to really home in on the Model 3 problem, said Ross. He cited as examples, Musk’s interest in rebuilding Puerto Rico and its infrastructure,The Boring Company, SpaceX and the Hyperloop.
“To be clear, we are Elon Musk fans,” he wrote.
“We love the long-term potential of most of his endeavors. However, from a shorter-term stock potential-perspective (what we are paid for) we see TSLA lagging for a while. It’s probably time to take some risk off the table,” said the note.
“If you want risk, we surmise bitcoin will reach $20,000 long before TSLA reaches $700. And you’ll be able to hedge your investment on the CME as of Sunday,” said Ross, referring to the exchange plans to start offering bitcoin futures from that day.
Cascend has buy ratings on Ford Motor Co. and General Motors Co.