Goldman Sachs Downgrades Tesla Amid Cash Flow Concerns, Cuts Target To $185

Goldman Sachs’ David Tamberrino believes Tesla Motors Inc TSLA shares have underperformed the S&P 500 since mid-May due to investor sentiment having been impacted by management’s deployment of capital for potential M&A.

Tamberrino downgraded the rating on the company from Buy to Neutral, while lowering the price target from $240 to $185.

Model 3 Launch

“We now see incremental risk to the business related to management’s deployment of capital for M&A, and further believe that any delay in the company’s timeline to launch its new Model 3 will be detrimental to shares,” the analyst mentioned.

Related Link: Morgan Stanley's Adam Jonas: Tesla's Huge Sales Beat Might Bring A Market Discount

Tamberrino expects Tesla to see a slower than expected ramp to the launch of Model 3, along with incremental SG&A spend, as the company continues with heavy investment and due to increasing R&D related to Model 3 and new products.

Cash Burn Concerns

The analyst also believes the proposed merger of Tesla Motors and SolarCity Corp SCTY, both of which are high growth, high cash burn businesses, would create “a higher risk entity given the combined ongoing capital needs and higher net leverage that would potentially result.”

The free cash flow burn estimates for 2017 and 2018, therefore, stand at $2.4-$2.5 billion and $1.3-$1.4 billion.

On the other hand, Tamberrino also expects Tesla to achieve positive EPS in Q3 2016, driven mainly by strength of its vehicle deliveries, which are likely to be in line with the guidance for H2 2016.

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