In spite of concerns, Tesla Inc (NASDAQ:TSLA) stock is likely to bounce from the recent fall.
For a while now, many analysts and investors have been voicing their skepticism about valuations and growth prospects of California-based electric car maker Tesla Inc (NASDAQ:TSLA). Analysts like Brian Johnson of Barclays and Goldman analyst David Tamberrino have been reiterating their "Sell" rating on Tesla, pointing towards its high valuation and cash burn, and giving the stock a price target below $200. We have also voiced out similar concerns. However, Tesla stock continued to rally brushing aside these concerns as bullish analysts continued to paint a very optimistic future.
But on Monday, Tesla stock was hit by a downgrade from one of its most vocal supporter on the Wall Street, Morgan Stanley analyst Adam Jonas. He downgraded Tesla stock to "equal weight" from "overweight". As a result of this downgrade, the stock is down more than 5% this week. The stock closed yesterday's trading session at $306.11, down 3%. The stock breached its 20-day moving average support level. Morgan Stanley gave two main reasons for the change in the rating - higher cash burn and increased competition. Both the concerns have been previously raised by different analysts.
Tesla's Cash burn will continue.
In his note, Jonas said that he expects the company to consume $3.1 billion of cash this year, compared with an earlier estimate of $2.3 billion. Tesla's cash burn has been a big concern for analysts. Last year, the company burned almost a $1 billion in operating cash flows. It had been forced to raise capital from the market on multiple occasions. Just recently, the company closed $1.3 billion funding round. But given, its investment commitments the company will continue to burn cash for a foreseeable future. In his note, Jonas questioned markets willingness to continue financing Tesla's strategic and investment ambitions. On a positive note though, the company exited its first quarter with almost $4 billion in cash. Hence it might not be approaching the capital markets anytime soon in spite of its strong cash requirements.
Threat of rising competition?
Another concern raised by Morgan Stanley is the threat of strong competition from tech giants such as Apple and Google in the autonomous driving space. Tesla has been projecting itself as the leader in the autonomous and semi-autonomous driving space, especially with the launch of Autopilot 2 update, which gave it an edge over other car manufacturers. The company also announced its intention to manufacture semi-autonomous trucks in the future.
However, all is not going well for the company on this front. The company has still not delivered the complete Autopilot 2 update which was promised by December last year. The delay has led to a class-action suit against the Palo Alto-based company. Many have also pointed out that the roll out of autopilot doesn't automatically mean that Tesla is ahead of its competitors. According to Barclays analyst Johnson, "Tesla’s roll-out of autopilot doesn’t necessarily mean that it’s ahead of its competition -- rather it’s just willing to use its customers as beta testers".
But Morgan Stanley's main concern is that Tesla might not be able to compete with well-capitalized tech giants who can afford to subsidize losses on their electric-vehicle products to increase their market share and get the data. “One of the biggest concerns we have about the ‘end-state’ of shared mobility from a Tesla perspective is the risk that other firms could enter the market as a competitor, offering the mobility service from, say, New York to Boston or from Santa Monica to LAX at a loss… just to get access to your time and data,” Morgan Stanley's report noted. That model could allow Google to one day drive you around practically for free, just like its all other products. However, many industry specialists believe that the competition is likely to be more intense from traditional auto manufacturers than tech companies.
Will Tesla stock continue to fall?
The recent downgrade by Morgan Stanley is a big headwind for Tesla stock, considering the firm's generally bullish opinion about the car maker. While the issues voiced by the rating agency are not new, the fact that it was raised by Tesla's vocal supporter will make many think twice before investing in the stock. However, it might not have much impact on the Tesla stock. The stock is likely to bounce back, just like it did after its huge earnings miss. For now, Tesla stock price is more likely to be driven by development on the Model 3 front than anything else. Tesla has announced its intention start Model3 production by July. If it manages to stick to the timeline, which many doubt, then the stock could go even higher.
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