Goldman, UBS Remain Tesla Bears Ahead Of Q2 Print, See Capital Raise As Likely

Tesla Inc TSLA will release its second-quarter financials on Wednesday, and the company’s bearish analysts don’t have high hopes.

The Ratings

Both UBS analyst Colin Langan and Goldman Sachs analyst David Tamberrino maintained Sell ratings on Tesla with $195 price targets.

The Thesis

Tesla’s stock has not been particularly reactive to bad news, which came in abundance last quarter, UBS' Langan said in a note. (See the analyst's track record here.) 

The automaker announced job cuts, requested refunds from suppliers, shuttered solar facilities, assembled vehicles from a tent, struck its tax credit limit and suffered management departures.

While Tesla did strike its production goal of 5,000 Model 3s per week, analysts like Langan questioned the rate’s sustainability. Tamberrino’s research suggests total vehicle production came in around 4,000 per week over the last four weeks, and investors will be seeking a return to the 5,000 rate. (See the Goldman Sachs analyst's track record here.) 

“The sustainability of this rate — particularly without the aid of the GA4 tent assembly line (which produced 20 percent of the 5,000 vehicles in the last week of the second quarter) — is important,as it potentially sets the company up for positive FCF in the third quarter as well as potential for putting incremental capex into Model 3 assembly to increase the production rate to the 10,000/week target,” the analyst said in a note. 

Consumer interest in the Model 3 remains high, although how it translates to order rates remains to be seen, Tamberrino said. 

Langan said the strategy of delaying cheaper Model 3 sales to push the expensive edition could portend a capital raise.

“The plan will drive abnormally high mix and margins ... in Q3," the analyst said. “We believe this will drive a profit in Q3 which will not be sustainable as prices normalize.”

Quarterly Expectations

UBS’s pessimism is based on expectations for cash burn, quality concerns and dubiously sustainable profitability.

Langan anticipates new deposits and working capital from suppliers driving cash burn improvements, from about $1.1 billion in the first quarter to $900 million in the second, with higher fixed cost absorption yielding an increase in auto gross margins from 18.8 percent to 19.6 percent.

Goldman Sachs increased estimates for 2018 and 2019 earnings before interest, tax, depreciation and amortization by an average of 11 percent, but cut 2020 and 2021 forecasts by 6 percent. It also expects free cash flow burn of $930 million with a cash balance of $2.2 billion.

Price Action

Tesla shares were down 3.18 percent at $287.72 at the time of publication Monday.

Related Links:
Tesla Appeals To Suppliers For Refunds To Buffer Cash Position
Needham Downgrades Tesla, Says Model 3 Refunds Are Outpacing Deposits

Photo courtesy of Tesla.