Forget the recent 30 per cent drop for Tesla (Tesla Stock Quote, Chart, News NASDAQ:TSLA) —the stock is really headed for $19 per share, according to research analyst Gordon Johnson of GLJ Research, who says that once the competition really revs up, Tesla will be left in the dust.
Tesla’s share price rallied on Wednesday as investors piled back into the stock which has had a rough go over the past week. Still worth about four times it was valued at the start of the year, Tesla saw a major pullback in conjunction with both the wider selloff in tech stocks and news that the S&P 500 Dow Jones Indices committee rejected the idea of including TSLA, by far the highest market cap car company at now $306 billion, in its S&P 500 Index of the largest US companies.
The move by the S&P seems to suggest that Tesla is more hype than substance. And Johnson, whose company has set a $19.00 price target for TSLA (representing a 90 per cent downside from here) would appear to agree.
“Tesla is a busted growth story,” Johnson said, in conversation with BNN Bloomberg on Tuesday. “Their revenues peaked essentially in the fourth quarter of 2018 and their margins peaked in the third quarter of 2018. This is despite the fact that still at today's valuation they’re valued at nearly the value of the entire auto industry, which means for them to basically grow into this value you need to see in roughly five years every car on the road being a Tesla car.”
Johnson argued that Tesla’s current run of profitability, which reached four quarters as of second quarter 2020 results released in July, is misleading, as those gains have depended in large part on regulatory tax credits sold to other automakers. Many jurisdictions such as the US state of California have requirements that car companies sell a certain percentage of their sales as zero-emission vehicles and so companies without electric vehicles (EVs) to sell will buy credits from Tesla instead. This past quarter, Tesla’s regulatory credit sales shot up to $428 million, with the company expecting the 2020 year to see twice the amount of credit sales as 2019.
But Johnson said that once other carmakers really get into the electric vehicle racket, Tesla’s tax credit income will dry up, just as auto companies worldwide start delivering on their own zero emission cars.
“Making electric vehicles is a loss-making endeavour and every automotive company understands this. A lot of automotive companies simply did not want to do it and so Tesla was the only guy doing it,” Johnson said. “But now in Europe, the rule took effect this year where if you don’t make EVs you get hit with big penalties. Now everybody in Europe is making EVs and Tesla's market share in Europe has gone from roughly 35 per cent in the fourth quarter of 2018 to single digits in the second quarter 2020, a massive
“And that competition is coming to the US,” Johnson said. “You have GM that’s going to have 12 EVs, you have Ford, the i3 and i4 from BMW and you have the Mercedes EQC,” Johnson said.
“We think a lot of [investors] don’t understand what they own. We think a lot of people see Tesla as the EV industry, and we think as the numbers come out the reality is going to be very grim for those who aren't looking specifically at the details,” Johnson said.