RBC downgrades Tesla, says Musk is selling a dream

RBC Capital markets has issued the first downgrade of the year for car-maker Tesla (Tesla Stock Quote, Chart NASDAQ:TSLA), saying that while the company is likely to experience significant growth over upcoming years, the stock is currently overvalued.

Ahead of Tesla’s fourth quarter earnings report scheduled for January 30, RBC has stated that the company’s better-than-expected profit delivered in its third quarter may have amounted to “peak profitability,” with the RBC report, titled “Waking Up from a Dream,” arguing that Tesla’s attempts to build an affordable and yet profitable electric sedan have failed to materialize.

“Whether its cutting the price of their lineup by $2k/unit, admission the federal tax credit expiring will hurt, acknowledgment that Tesla can’t sell at $35k Model 3 profitably and costs need to come down, or language around full-self driving – we’d classify recent commentary and actions by the company as more realistic,” reads the report.

“The current valuation already considers overly lofty expectations. For instance, let’s assume 1 million [Model 3] units at $55k ASP, 12 percent EBIT margins, no interest/equity raise all by 2025. This is undoubtedly solid earnings, but at a more ‘mature’ 15x P/E, the discounted back value is ~$195, meaning even in an optimistic case at least 1/3rd of today’s price is an Elon premium,” the report says.

The reference to recent commentary alludes to a blog post from CEO Elon Musk last week which said Tesla would be cutting its workforce by seven per cent and warned that in making affordable electric cars for the mass market, the “road ahead is very difficult.”

Those comments triggered a drop in Tesla’s share price, which had fallen 14 per cent between January 17 and January 22, with the stock falling a further five per cent as of late-day trading on Wednesday.

“RBC thinks that this grand transition that Tesla has been trying to make from selling high-end cars and using that to subsidize making a low-end car is just not going to bear fruit or will take longer to bear fruit,” commented Amber Kanwar of BNN Bloomberg yesterday.

“[RBC] still sees 28 per cent growth in their deliveries and 17 per cent growth in their revenue through to 2022 but they say that even though these are great growth metrics that you’d be hard-pressed to find anywhere else in the automotive and tech sectors, they think that the stock is discounting a much higher [growth] level,” Kanwar added.

RBC has issued an “Underperform” rating and a target price of $245 for TSLA, representing a 17-per-cent downside over Wednesday’s share price and down from its previous target of $290.

According to TipRanks.com, TSLA now has eight analysts with “Buy” ratings, seven with “Hold” ratings and nine with “Sell” ratings.