Business

Bernstein Downgrades Tesla, Valuation “Mind-Boggling”

Published

4 years ago

July 29, 2020

Bernstein downgrades Tesla, valuation is “Mind-Boggling,” says analyst Toni Sacconaghi. In a note issued Tuesday, the firm downgraded its rating on Tesla shares from “market perform” to “underperform.” Bernstein held on to a $900 target price. This hints that the firm believes share prices will drop 42% by next year.

Tesla started 2020 at $443.01 before a series of rallies raised its stock price. Share prices went as high as $1,643 last July 20 before settling to its present rate. Soon after the note, Tesla shares fell 4.1% to $1,476 as markets closed Tuesday.

Sacconaghi noted that Tesla's $275 billion market cap is more than Toyota and Volkswagen's total value. Yet, Tesla only manufactures 500,000 cars per year, while the two giants produce a total of 20 million cars. He said that Tesla’s recent surges have gone too far, and year-to-date gains are unrealistic. “Tesla now even looks expensive versus large-cap growth tech,” he added. As such, investors should wait for a better time to buy-in.

The analyst said: “Despite our relatively bullish stance on electric vehicle evolution, and structural advantages we believe Tesla may hold, we find it difficult to justify Tesla's current valuation even under our most bullish/imaginative scenarios.”

Unprecedented Success

Bernstein has their reasons why Tesla stocks can run out of steam. A looming rotation to value stocks can end Big Tech's rally and leave Tesla and other big names in the lurch. Sacconaghi feared that the introduction of the Model Y SUV could eat into sales of the Model 3. He also mentioned that the newer models may not be able to sustain the target 30% growth over the years.

Despite the pessimism, Bernstein laid out a bull case for the stock of at least 30% higher at $2,000. This only happens if Tesla will “transform the auto industry's economics.” This means delivering 6 million vehicles by 2030 with a 15% operating margin. It also entails success in its Semi, energy storage, and auto-drive software divisions. “Unless Tesla can boast the same margins as Porsche while delivering millions of more cars, its share price can't reasonably turn higher,” Sacconaghi said.

Sacconaghi clarified that Bernstein is not advocating investors to short the stock. He said that it's a “fool's game” and will be like asking investors “to step in front of a barreling freight train.”

Even if they made a valuation call, Sacconaghi says they remain optimistic in the short term. The analyst noted: “Expectations appear achievable/beatable, the forthcoming Battery Day could be noteworthy, and there is strong price momentum in both Tesla and among growth stocks more broadly,” the analyst said.

During its 2Q earnings call last week, Tesla reported $6.04 billion in revenue vs $5.37 billion expected. EPS was $2.18 per share, blowing away analyst predictions of $0.03.share. Net income amounted to $104 million. With its first year of full profitability, Tesla can now join the S&P 500 index. Tesla also announced that it will build its largest plant in Austin, Texas. Located in Travis County, near Austin, the plant aims to hire 5,000 workers at a minimum wage of $15/hr. The total investment for the plant is $1.1 billion.

Tesla bet on themselves to transform the industry, and their present market valuation seems to agree with them. Bernstein thinks it will all come crashing down as soon as deliveries fall short.

Watch this video as Bernstein downgrades Tesla from “market perform” to “underperform,” saying that the company’s current valuation is “mind-boggling:”