CFRA Research Downgrades Tesla, Sees Risks Ahead After Huge Run

Tesla Inc TSLA shares have been on a tear in the past six months, but another Wall Street analyst joined the ranks of Tesla bears on Thursday.

The Analyst

CFRA analyst Garrett Nelson downgraded Tesla from Hold to Sell and reiterated his $400 price target.

The Thesis

Nelson said the stock has simply become overvalued after skyrocketing from a June low of under $180 to a January high of nearly $500. Nelson said Tesla’s recent price range is not fully reflecting the near-term risks the company is facing.

“We see the recent China factory start-up weighing on Automotive gross margins in 1H 2020 and U.S. sales being negatively impacted by the recent phase-out of its federal EV tax credit, rising competition and seasonality,” Nelson wrote in a note.

He said Tesla will need to devote between $4 billion and $5 billion to its Germany factory in the near future, which will weigh on the company’s free cash flow. Tesla reported a surprise profit in the third quarter of 2019 but it hasn’t been able to string together more than two consecutive profitable quarters since it began producing the Model 3.

In addition, Nelson said Tesla may need to raise more capital by issuing equity, which would be dilutive to EPS.

Tesla’s market cap now exceeds General Motors Company GM and Ford Motor Company F combined, despite the fact that Tesla has only about 3% of the sales volume of its larger competitors. Nelson said those numbers suggest Tesla shares already have some extreme growth priced in. If the company is unable to execute on that growth, the shares have significant downside risk.

Benzinga’s Take

Tesla is a unique stock in that it trades almost entirely on headlines rather than the company’s underlying financial metrics. Nelson is far from alone in thinking the stock has run too far too fast given the average price target among the 29 analysts covering Tesla is $340.

Tesla's stock traded around $496 per share at publishing time.

Do you agree or disagree with these predictions? Email feedback@benzinga.com with your thoughts.

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