Tesla Motors Inc (NASDAQ:TSLA) just gained another red mark on its valuation, at least according to Goldman Sachs Group Inc (NYSE:GS).
The investment bank downgraded its outlook of Tesla stock based on a number of factors, namely a broader decline in the auto industry. The report comes after weeks of uncertainty roiled car makers. (Source: “Goldman Slams US Auto Sector As “Cycle Has Peaked”, Downgrades Tesla,” Zero Hedge, October 6, 2016.)
Advertisement
Investors were already nervous when Ford Motor Company (NYSE:F) announced during a conference call this past summer that it expected sales to decline in 2017. Senior executives who were on the call said that sales had “reached a plateau” this year, which was evident from unusually high sales incentives.
However, many could brush off Ford’s comments as company -specific risks. The iconic American car maker was going bullish on new technology, like driverless cars and electric vehicles. It had embraced a roadmap to fully self-driving cars by 2021, a move which they acknowledged was cash heavy.
Investors used that reasoning to wedge apart the fates of Ford stock and Tesla stock, but Goldman Sachs thinks they can’t be so easily divided. Rather, they believe that, “rising interest rates and crude oil prices,” could act as, “headwinds,” to the entire auto industry.
Of course, as an electric car company out to disrupt the combustion engine paradigm, rising crude oil prices could be a tailwind for Tesla. But Goldman Sachs thinks the broader trends have put all car makers on shaky grounds. They are looking for manufacturers that will step lightly, but Tesla took itself off the list by attempting to buyout SolarCity Corp (NASDAQ:SCTY).
Goldman Sachs’ analysts don’t like the company’s willingness to shell out money for a merger when it has yet to prove it can produce cars at scale. Trying to expand into solar while ramping up production on the “Model 3” was a mistake born of overconfidence, according to these analysts.
Credits: Flickr.com/JohnBragg
“We downgrade shares of TSLA from Buy to Neutral and lower our 6-month price target to $185. TSLA shares were up only 0.1% vs. the S&P 500 +5.0% and our coverage +6.0% since being added to the Buy list on May 18, 2016, as management’s deployment of capital for potential M&A has likely weighed on investor sentiment on the concept stock,” said Tesla in a statement. “We now see incremental risk to the business related to management’s willingness to deploy capital for M&A, and we believe that any delay in the company’s timeline to launch its new Model 3 will be detrimental to shares.”
“We also note that our illustrative pro-forma analysis for the proposed combination of TSLA and SCTY implies increased corporate leverage and exacerbated cash burn – though we take no view on the likelihood of the deal closing,” the company added. “However, with solid 3Q16 deliveries, above Street consensus estimates for 3Q16, and potential downward catalyst of a missed Model 3 launch timeline out in 2H17, we prefer to be Neutral on shares in the near-term.” (Source: Ibid.)
