Tesla Motors Inc Model 3, the new, lower-priced EV is in strong demand, and this is good news for the company. But for investors, this is bad news because selling less expensive cars leads to lower average selling prices, thus leading to lower profits.
Slashed estimates for Tesla revenue and profit
Analyst Brad Erikson at Pacific Crest Securities slashed estimates for average prices, profit, units delivered and revenue after raising concerns over Tesla Motors Inc ’s ability to reach production targets and considering the recent disappointing second-quarter sales results. Erikson cut his fair value estimate for Tesla’s stock from $212 to $190 – around 11% below current levels.
In a note to clients, Erikson wrote that the “checks indicate initial demand for Tesla’s new, less-expensive car is strong, which would be dilutive to gross margin.” Erikson said he is lowering the estimates to reflect this, “previously-reported Q2 deliveries and slightly lower unit volumes due to persistent production challenges.”
The analyst slashed his 2016 outlook for blended average selling price from $98,100 to $97,700, for total deliveries from 85,500 to 80,680, for revenue from $8.3 billion to $7.8 billion, for gross margin from 23.1% to 22.1%, for per-share results from a profit of 44 cents to a loss of 66 cents. Owing to ongoing concerns about production ramp, Erikson maintained his rating at Sector Weight, where it has been for the past 12 months.
Tesla Model 3 – fraught with financial risk
Erikson said they continue to believe that the Model 3 appears overly ambitious and fraught with financial risk, thus limiting visibility to a stable path to profitability.
Erikson believes Tesla’s attempted SolarCity buyout is more a distraction that simply reduces the shareholder audience, but does little to further Tesla’s brand. Neither the recent report of the first crash involving a Tesla electric car in Autopilot mode is likely to further the brand. In addition, we heard about another serious crash involving a Model X, but whether or not Autopilot mode was in use, is something that NHTSA is still investigating. An art gallery owner told the police that his Model X was in Autopilot mode when it crashed and rolled over, according to the Detroit Free Press. Both the driver and passenger survived the crash.
Separately, Deutsche Bank analyst Rod Lache also lowered his earnings estimate, and now expects a sizable per-share loss of 42 cents versus his previous estimate of 9 cents per share in earnings. Lache, who recommends a Hold on Tesla Motors Inc , is unsure if the company has addressed its production challenges.
At 9.48 am EDT, Tesla shares were up 0.12% at $214.69. Year to date, the stock is down almost 10% while in the last one-year, it is down almost 20%. This year, the S&P 500 index has gained 2.5% in comparison. The stock has a 52-week high of $286.65 and a 52-week low of $141.05.