Jefferies’ Bear Call Sends Tesla Inc (TSLA) Stock Careening

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Tesla Inc (NASDAQ:TSLA) stock dropped 2.6% Tuesday after a bearish call from Jefferies analyst Philippe Houchois. TSLA stock had been on track to set another all-time high — with Tesla looking to clear $400 for the first time — before Tuesday’s pullback.

Jefferies' Bear Call Sends Tesla Inc (TSLA) Stock Careening

Source: Tesla

Houchois’ downgrade, and $280 price target (27% below TSLA’s close yesterday) is based on several of the concerns that bears hold toward Tesla stock.

With the market pushing TSLA shares down, it’s worth asking two questions. Is Jefferies right? And when, if ever, will it matter?

Is Jefferies Right on Tesla Stock?

Of course, it’s far too early to tell whether Jefferies is right. As I’ve written before, the argument over TSLA stock is one over cash flow modeling a decade or more into the future, one key reason why investors on both side of the trade should keep their minds open and their attitudes flexible.

But Houchois does make some interesting points, at least based on the excerpts of the report released to the press. Per CNBC.com, Houchois predicted Tesla wouldn’t turn a profit until 2020. He questioned whether the company could actually hit a long-term gross margin target around 30%. And the analyst argued that DCF (discounted cash flow) calculations simply didn’t support the current valuation.

All three points are pillars of the bear case for Tesla stock. And they make some sense. While TSLA bulls see the Model 3 as moving the company toward profitability, it still has a long way to go. Not a single of the 20 analysts estimating full-year earnings project profitability next year, or anything close.

Meanwhile, it’s important to remember that Tesla has a long history of overpromising and underdelivering. And that has to raise concern about the 30% gross margin target. Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) already have lower gross margins than Tesla, even adding back R&D spend. Expecting Tesla to increase that figure with lower-priced, mass-produced cars looks potentially aggressive.

It’s one thing for automotive gross margins to be 23.4% (as they were in 2016), when selling a $70,000 car. That figure becomes much more difficult to maintain at a $35,000 price point. After all, a car that costs half the price to buy generally doesn’t cost half as much to make.

Is TSLA Stock Too Expensive?

The analyst’s valuation argument, meanwhile, essentially is that Tesla stock is just too expensive. Houchois isn’t necessarily a bear on Tesla stock. He writes, according to CNBC, that “it is with a bit of a heavy heart that we initiative coverage of Tesla at underperform.”

This, too, is something for Tesla bulls to consider. The analyst likes Tesla as a company. His take isn’t a knee-jerk bashing of the stock, or a questioning of whether Elon Musk truly is the visionary many shareholders think.

In other words, Houchois’ point is that Tesla can win as a company — but TSLA can still lose as a stock. At a certain point, even fantastic, transformative, growth is priced in. And with Tesla stock up almost 80% year-to-date, and having doubled just since December, that seems a valid point.

Will The Downgrade Matter?

Of course, in the near term, this likely all is somewhat moot. Particularly until full-ramp Model 3 production and sales numbers are available, Tesla stock is going to come down to an argument between bulls and bears over how much confidence they have in the company.

Again, valuation is based on projected sales figures in 2025 and 2030, which themselves rely on projections of economic growth, oil prices, steel costs, and literally hundreds of other factors.

But from here, Jefferies certainly makes some good points, and creates a solid case for caution toward Tesla stock. An investor need not hate Tesla, or Musk, to question whether Tesla really is worth $63 billion already.

At this valuation, success for Tesla as a company isn’t the same as success for Tesla stock. And that’s something TSLA bulls should keep in mind going forward.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/jefferies-bear-call-sends-tesla-inc-tsla-stock-careening/.

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