Tesla downgraded to underperform by RBC on the ‘Elon premium’

Robyn Beck | Pool | Reuters

Tesla founder Elon Musk speaks at the unveiling event by “The Boring Company” for the test tunnel of a proposed underground transportation network across Los Angeles County, in Hawthorne, California, December 18, 2018.

Tesla was downgraded to underperform by RBC Capital, which said that the electric car maker has finally started to give some straight talk to investors about its future growth, but many are still not listening because they are still too enthralled by the company’s founder and CEO Elon Musk.

Analyst Joseph Spak writes:

“It’s not that we don’t believe Tesla can grow over time, our model shows solid LT growth. But the current valuation already considers overly lofty expectations. For instance, let’s assume 1mm [Model 3] units @$55k ASP, 12 percent EBIT margins, no interest/equity raise all by 2025. This is undoubtedly solid earnings, but at a more ‘mature’ 15x P/E, the discounted back value is ~$195, meaning even in an optimistic case at least 1/3rd of today’s price is an ‘Elon premium’.”

Tesla shares fell 1.5 percent in premarket trading Wednesday following the call. Through Tuesday, the stock was down 10 percent on the year to $298.92.

“The company seems to be more tactful with messaging which is a long-term positive, but means downward pressure to growth expectations – which in our view are too high to justify current levels, let alone to add to positions,” wrote Spak.

In the latest round of cost-cutting measures, Tesla said last week that it would cut 7 percent of its workforce and discontinue production of some other models to focus on the Model 3. Musk also said that the company likely achieved a “tiny profit” in the fourth quarter.

“For years, Tesla sold the dream of transportation disruption and fantastic growth. This served the stock well turning Tesla into a top 6 (at times top 3) valuable auto OEM despite delivering a fraction of units of others and nary a profit,” wrote Spak. “A stock should of course discount future cash flows and the market took the promises of Tesla and their future growth potential to justify lofty valuations while Tesla took capital needed to support their endeavors. But the rubber appears to be hitting the road as the realities of Tesla becoming a volume player, the challenges to scale and deliver high volume at high ASPs/margins are coming to a head.”

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