Reuters
A second team of analysts now says that Tesla Inc. likely will raise equity or debt this year and face more production delays with its Model 3, despite the Silicon Valley car maker’s assurances to the contrary on both counts.
Analysts at Bernstein said they expect “production delays and the specter of a capital raise to dominate investor attention” on Tesla in the next two quarters. Further Model 3 delays would not necessarily “make or break Tesla,” they said, but they would intensify the company’s cash burn.
Another capital raise appears likely, unless Tesla is able to “materially” rein in near-term operational and capital expenses spending, they said.
Beyond the next two quarters, investors are likely to focus on Model 3 gross margins and the mass-market sedan’s build quality, the analysts said. “We remain skeptical on both fronts.”
The Bernstein analysts kept the equivalent of a neutral rating on the stock and their price target at $265, which represents a downside around 9% from Tuesday’s share price.
Earlier this month, analysts at Goldman Sachs also said in a note that the Silicon Valley car maker will have to tap capital markets this year. The Goldman analysts then lowered their price target on Tesla shares to $195 from $205, a downside around 33% over Tuesday’s share price.
On the positive side, the Bernstein analysts said they have “long believed that if Tesla can actually execute on the Model 3, then the company will have substantial room to run, due to the rapid growth of the electric vehicle market and a lack of current competition at the Model 3’s price point.”
Bernstein earlier this month cast doubt on the number of Model 3 reservation holders that had actually decided to go forward with their purchases when their turn to select a car arrived. To reserve a Model 3, customers must pay a $1,000 refundable deposit.
Tuesday’s note stemmed from a joint conference call with investors and Bernstein analysts Toni Sacconaghi, who is based in the U.S. and covers Tesla as well as major tech companies, and Max Warburton, who is based in the U.K. and covers European auto companies.
Production of the Model 3, the cornerstone of Tesla’s expansion plans, has been marred by delays and a string of postponements of its milestones. Tesla over the weekend halted the car’s production for a second time this year, a move the company called “planned downtime” aimed at improving production.
Tesla in early April reported a first-quarter Model 3 production rate still below its goals but said it would not need to raise more money this year given the progress made during the quarter.
Here are some highlights of the conference call, as referenced by the note.
‘Hyper-automation’ likely to blame for production hiccups
Many in the industry presumed that building the Model 3, while a new experience for Tesla, “would be reasonably straightforward” for the company, Warburton said.
By Bernstein calculations, Tesla has spent about $2 billion of its 2017 capital expenditure budget around $3.5 billion on the Model 3 assembly line at its Fremont, Calif., plant, an amount the analysts called “mind-blowing” to spend on a second line at an existing factory.
That money appears to have been spent on hyper-automation, at a time when many manufacturers are rolling back from automation. Chief Executive Elon Musk himself said in a TV interview last week that Tesla had “too many robots,” he said.
Model 3 still likely finished by hand
Tesla is likely still having to finish Model 3s by hand, with the automated systems “probably not working” and cars coming off the end of the assembly line “in a semifinished state,” Warburton said.
“I think the rework levels in this plant must be mind-blowing, and I’d be extremely concerned about the quality of these vehicles when they come to be shipped,” he said, according to the note.
Can Tesla ‘fix’ all that at the Fremont plant?
Looking at the size of Tesla’s Fremont plant, and the way Tesla has designed the Model 3 and set up the assembly line, “it’s going to be extremely difficult to reorganize it to build the car conventionally,” Warburton said.
Looking forward to Tesla’s planned “Model Y” vehicle, expected to be a compact SUV, Tesla would be wiser to start a new platform, “a greenfield site in an attempt to be third time lucky.”
“Model S and X were too labor intense. Model 3 is too capital intense. Maybe on the third time around, they could get Model Y right. But I think at Fremont, this company is going to continue to struggle,” he said.
Real competition still years away
A bit of good news: there’s “very limited true competition to the Model 3 in the next two years,” the Bernstein analysts said. A true competitor would be a car with a $35,000 to $50,000 price tag, and a luxury nameplate. The Chevy Bolt, for instance, might not be a competitor, as it hits the price tag but it's not from a luxury car maker.
“As a result, we see pretty clear running room for the Model 3. The earliest-arriving competitor will probably be the Mercedes-Benz EQ, in late 2019,” Sacconaghi said, according to the note.
On capital raise and margins
Recent company comments on how it won’t require an equity or debt raise “should be taken with a grain of salt,” particularly as Tesla has historically underestimated its capital requirements, Sacconaghi said.
In the medium term, investors will likely be focused on Model 3 gross margins and the sedan’s quality. These two items “will ultimately decide the bull vs. bear debate,” Sacconaghi said.
Tesla has long targeted a 30% automotive gross margin overall, but remains below that target. The Bernstein analysts said they continue to be “worried and skeptical” about the company’s margins.
In terms of Model 3 build quality, problems in that arena would strain Tesla’s service capacity even further and undermine the Tesla brand.
Tesla might have time and consumer leanings on its side, however: “We’re bullish longer term on electric vehicles, so if Tesla could execute on the Model 3, it has plenty of room to run,” the Bernstein analysts said.
Tesla shares have lost 4% in the past 12 months, and 7% so far this year. That compares with 15% and 1.2% gains for the S&P 500 index and advances of 20% and 0.3% for the Dow Jones Industrial Average.