Needham Downgrades Tesla, Says Model 3 Refunds Are Outpacing Deposits

The large and growing group of Tesla, Inc. TSLA bears on Wall Street got a new member Thursday.

The Analyst

Needham analyst Rajvindra Gill downgraded Tesla from Hold to Underperform. 

The Thesis

Investors have five reasons to avoid Tesla stock, Gill said. (See the analyst's track record here.)  

• Model S and X sales could be under pressure from increasing competition and potential cannibalization from the Model 3. 
• Persistently high costs have resulted in slower-than-expected improvements in Model 3 gross margins.
• ZEV credit declines in 2019 will add to margin pressures.
• The recent restructuring will result in lower energy revenue.
• A projected $6 billion in free cash flow burn through 2020 results in an unsustainable capital structure.

Persistent issues with Model 3 production have prompted Gill to lower Needham's 2019 revenue and EPS estimates from $26.6 billion and $1.80 to $26.3 billion and 80 cents, respectively. Both projections are now significantly below consensus Wall Street estimates of $28.1 billion in revenue and $2.27 in EPS. Gill also lowered his 2019 gross margin forecast from 17.9 percent to 17.1 percent.

Gill’s latest round of checks also suggest an extremely troubling trend in Model 3 order cancellations.

“In August '17, TSLA cited a refund rate of 12 percent. Almost a year later, we believe it has doubled and outpaced deposits,” he said. 

Reasons for cancellations vary from extended four-to-12-month wait times to the expiration of the $7,500 electric vehicle tax credit to the unavailability of the base price $35,000 Model 3.

Price Action

Tesla shares were down 2.52 percent Thursday morning in the wake of the wake of the downgrade and are now down 8 percent in the past six months.

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Photo courtesy of Tesla.