UBS Sees 50% Downside Potential In Tesla, Cautious On Model 3 Launch Timing

Is Tesla Inc TSLA ripe for a correction after its meteoric rise since December 2016?

One analyst thinks so. Tesla shares surged up by 71 percent during the period amid optimistic expectations concerning the Model 3 rollout and the company's strong deliveries guidance issued in early April.

On May 1, ahead of the first-quarter results, the stock ran up to its all-time high of $322.83, eclipsing the market cap of traditional automaker General Motors Company GM.

Source: Y Charts

Valuation: Worth Half Current Levels?

Reviewing Tesla's first-quarter results, UBS analysts Colin Langan and Julien Dumoulin-Smith maintain their Sell rating and $160 price target, suggesting roughly 50-percent downside.

A Technical Take

Negative reaction to the earnings has resulted in some weakness in Thursday's session. If the stock sustains the downward move, it could find support around the $300 area, which is a psychological level as well as a near-term consolidation zone. On further weakness, the stock may find support around its 50-day SMA of $279.27. The 14-day RSI is suggesting that the stock is heading toward the overbought zone.

Source: Y Charts

Quarterly Print

UBS noted that Tesla reported a first-quarter loss of $1.33, missing the consensus estimate but operating income was in line. Gross margins were better, while operating expenditure was worse, the firm added.

Auto gross margins increased 540 basis points sequentially due to higher ASPs and $35 million of autopilot deferred sales.

Solar deployments fell as Tesla focused on profitability, with 31 percent of customers purchasing versus leasing compared to 9 percent last year.

UBS's Take On Model 3

UBS said it remains cautious on the launch timing of Model 3, even as the company confirmed the July launch schedule. The firm expects Model 3 profitability to be challenged given the lower price point and higher battery cost.

Despite the company's claim that Model 3 would lead in efficiency, the firm feels investors will need to wait for the Model Y plant in around 2019 before it implements major changes to auto production & automation.

"The ramp of the Model 3 should create a short term working capital cash tailwind; however, we remain cautious on cash burn long term given the challenging Model 3 profitability," the firm said.

Other Models

UBS noted demand for Models S/X may be slowing as deliveries flattened sequentially, although the company attributed this to capacity. Additionally, the firm said there was no directional order update.

"TSLA will see increased competition as most luxury OEMs are launching EVs in 2018-20," the firm said.

Cash Burn Schedule Pushed Out

UBS said the company's first-quarter free cash flow of a negative $622 million was better than its estimate of a negative $1.2 billion, with the beat achieved on the back of lower capex. However, the firm noted that the guidance implies a large spike in capex to $1.4 billion in the second quarter versus $0.55 billion in the first quarter.

Of Note: Semi-Truck In Second Half

UBS noted the company confirmed plans for its semi-truck reveal in the second half.

Gross Margin Outlook

The firm expects the second-quarter margins to fall 250 basis points due to the non-repeat the autopilot benefit.

At the time of writing, Tesla shares were down 4.25 percent at $297.79.

Related Links:

Tesla And The Auto Market's New 'Big Three'

Tesla Now Expected To Turn Cash Flow Positive By Next Year

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Image Credit: By Steve Jurvetson [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons