Tesla Stock Downgraded by Goldman Sachs and Morgan Stanley

Rob Maurer

Goldman Sachs and Morgan Stanley Downgrade TSLA

After market close Thursday and before open Friday, Goldman Sachs and Morgan Stanley issued updated notes on (TSLA) -Get Report, both downgrading the stock.

Morgan Stanley downgraded Tesla to Underweight from Equal-weight and lowered their price target to $650 from $680, citing short term demand/pricing risks. Analyst Adam Jonas noted Tesla’s recent price cuts in the US and China, and updates to Tesla’s Model Y program. Tesla recently lowered Model Y delivery timeframe estimates and added Model Y to their referral program.

Jonas is projecting 419k deliveries in 2020, 835k deliveries in 2022, and 2.3 million in 2030.

“Our $650 price target is predicated on Tesla reaching 2.3MM units of volume by 2030 (or just over 10% of the global EV market on Morgan Stanley estimates) at 16.5% EBIDTA margins.” - Morgan Stanley

Morgan Stanley’s forecasts are well below Tesla’s goals. In their Q1 letter, Tesla stated that they expect their installed production capacity to reach 790,000 in 2020, just 5% below Morgan Stanley’s delivery forecast for 2022.

Screen Shot 2020-06-12 at 11.06.53 PM
- Tesla's Q1-2020 Shareholder Letter

During Tesla’s Q1 earnings call, CEO Elon Musk said that he would be “very shocked” if Tesla’s automotive compound annual growth rate (CAGR) did not exceed 40% until 2030, implying a target of at least 15 million vehicles in 2030. Morgan Stanley’s forecast for 2030 is 85% below this level.

In the updated note, Morgan Stanley includes a price target sensitivity table showing possible terminal cases for Tesla in 2030 spanning ranges of vehicle deliveries and EBITDA margins. The table’s upper boundary for deliveries is 5 million vehicles, just 1/3 of Tesla's implied 40%+ CAGR target. At EBITDA margins between 12% - 19%, 5 million deliveries in 2030 gives Morgan Stanley a discounted price target range of $987 to $1,563.

Goldman Sachs also downgraded TSLA to neutral, but increased their price target from $925 to $950. The downgrade was primarily due to valuation concerns.

"We'd look to become more positive on Tesla stock again if we had more confidence in the near to intermediate term trajectory in fundamentals, or if valuation became more attractive.” - Goldman Sachs

Goldman Sachs expects 425k deliveries from Tesla in 2020.

Speed Limit Sign Recognition & Roundabout Support

Twitter user @greentheonly who has a reputation for digging into Tesla's firmware recently tweeted about possible upcoming features for Tesla’s Full Self-Driving suite.

“Coming soon to a Tesla near you: Speed limit recognition worldwide (with 3d rendered signs) and roundabout support.” - @greentheonly

As Tesla continues to expand their feature set for Full Self-Driving, the take rate on the option should improve, allowing Tesla to capture more revenue and margin. They will also have to defer less of that revenue.

Select Solar Roof Cancellations

On Thursday, Electrek posted an article titled “Tesla starts canceling Solar Roof orders after years of taking deposits.” It mentioned an email Tesla sent to some customers in Michigan and Oregon, cancelling their orders.

“Upon further review, your home is not located within our currently planned service territory. The driving distance from our closest warehouse would make it difficult for us to provide you the high-quality service that our customers deserve. For this reason, we will not be able to proceed with your project.” – Tesla, per Electrek

Though these customers will get a full refund, it is certainly disappointing for them. It does not, however, mean that Tesla is cancelling the Solar Roof product line. Tesla currently lists 100+ job openings on their website related to Solar Roof. The “service” aspect mentioned in the email likely relates to servicing the installation given the daily commute from the warehouse locations needed for installation. Paying drivers for lengthy drives might erase the small margins Tesla is likely capturing in the early stages of Solar Roof production.

Ford Delays Electric F-150

Ford’s Chief Operating Officer mentioned in an interview with CNBC that the timeline for Ford’s electric version of the F-150 has been pushed to mid-2022 from the prior “before-2022” target. They also recently announced the cancellation of their collaboration with Rivian for an electric SUV under their Lincoln brand.

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