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Tesla’s ‘unrealistic expectations’

November 29th, 2013 at 11:50 AM
Tesla Fires Stock

Tesla Motors has had a rough couple of months. Shares hit an all-time high of $194.50 in late September, then concerns about the fires on the Model S crept up. Following that, third-quarter earnings were great, but concerns about selling more Model S units in the fourth-quarter hit the stock. Now, an analyst thinks Tesla’s woes aren’t just short term in nature, it’s a case of unrealistic expectations.

Merill Lynch analyst John Lovallo, who’s been a bear on the stock and the company, believes the unrealistic expectations about Tesla selling so many cars in the future are likely to weigh for quite a while. “While these [battery fires, recall potential] concerns may be valid, we believe an even more significant risk for shareholders lies in the fact that Tesla’s current market value continues to imply lofty and possibly unrealistic volume expectations,” Lovallo wrote in the note. Tesla would have to sell 348,000 cars per year by 2020 in order to justify the current ~$15 billion market cap.

Lovallo rates Tesla shares underperform with a $45 price target.

To put that into perspective, Tesla expects to sell around 21,000 units this year, so obviously that’s a huge discrepancy in volume.

There’s also the concern that as Tesla begins to start work, and ultimately produce its third-generation, low-cost car, margins will come down. CEO Elon Musk has said that he wants the car to cost around $40,000. If Tesla sells around 210,000 units of the third-gen car, Lovallo thinks it’ll be hard to generate EBIT (earnings before interest and taxes) margins of 12.5%, something that’s reserved for the very upper echelon of luxury makers. Essentially, Lovallo is questioning Tesla’s stock price, despite having come down approximately 40% since the highs seen in September.

Tesla recently asked for a voluntary investigation from the National Highway Traffic Safety Administration (NHTSA) to probe the two Model S fires on domestic soil. A third Model S fire also happened recently in Mexico.

Other automakers have seen a decline in sales when there have been problems with their cars, and a recall has been issued. So far, CEO Elon Musk has said there will be no recall of the Model S. Tesla recently issued an over-the air update so that the car’s air suspension will provide greater ground clearance at highway speeds.

With concerns about a potential recall upcoming, and whether the company can actually make enough units, Lovallo openly questions Tesla. You can add that negativity to the pile.

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