Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
The big news this week may be the downgrade that followed it.
Here are three things you need to know.
Tesla reported fiscal Q4 and full-year earnings last Wednesday, and the report was chock-full of the numbers investors wanted to know: Sales -- up 88% year over year to $2.3 billion. Cars produced -- up 77% to 24,882. And profits? (Ha! Surely you jest.) Profits were negative $0.78 per share -- a bad number, but not as bad as 2015's $2.44 Q4 loss.
Also noteworthy was the fact that Tesla's production in Q4 fell short of the company's promises, and even declined from levels produced in Q3. But on the other hand, management noted that when Model 3 production begins this summer, the company plans to ramp rapidly to 5,000 vehicles produced per week (by Q4 2017) and then double that to 10,000 vehicles per week in 2018. If Tesla hits that target, the company will soon be producing almost as many cars per month as it did per quarter last year.
Sound impressive? Well, unfortunately, Mr. Market didn't think so. The day after earnings came out, Tesla stock dove 6.4% -- and today they're down another 5% in response to a big downgrade from Goldman Sachs. As reported this morning on StreetInsider.com, Goldman -- which was already feeling only neutral heading into earnings -- has gone ahead and pulled the sell trigger on Tesla stock.
Goldman says it has "concerns" regarding Tesla's "operational execution on the Model 3 launch," and has little faith in CEO Elon Musk's promised build rate on the new electric jalopy. Goldman deadpanned that it sees Tesla "pushing volume growth out and to the right" (i.e., there will be fewer cars produced, and it will take Tesla longer to produce them). Additionally, the analyst derides Tesla's recently purchased SolarCity as an "unproven solar business."
While Musk argues that taking SolarCity in-house was necessary to transform Tesla from a car company into an energy solutions company, Goldman believes that the new solar panel business "provides limited synergies" with electric cars, and will distract the company from "the singular focus it should have" on ensuring that Model 3 is a success.
3. Dilution is coming
SolarCity will also be a cash drain. Says Goldman, taking SolarCity in-house "increased the risk profile of Tesla amid a business model transition" and "raised the net leverage of Tesla." Not coincidentally, Musk himself seemed to support this theory in comments on his after-earnings conference call Wednesday, musing that "capital needs to be raised for the Model 3, but we get very close to the edge," and so "it probably makes sense to raise capital to reduce risk."
The most important thing: What it means to shareholders
So what is the upshot for investors? Ultimately, Goldman Sachs' decision to downgrade Tesla stock is just one more opinion in a sea of opinions on Tesla stock. (According to S&P Global Market Intelligence's latest tally, the 22 analyst ratings on file show seven brokerages recommending that you buy Tesla, seven more rating the stock a hold, and eight more advising that you sell Tesla stock.)
But here's one fact you can take to the bank: Both Goldman Sachs, and now Tesla's own CEO, are actively discussing the likelihood that Tesla will have to sell more stock and raise more cash to finance its development of the Model 3 -- and at the same time as it tries to create a viable business model for the SolarCity solar panels business. And with Tesla stock down 11.5% in price from what it fetched just a couple days prior to earnings, each new share of stock issued will infuse considerably less cash into Tesla's red ink-bleeding income statement.
Meanwhile, every share sold dilutes Tesla's faithful investors just a little bit more, and makes the profits they will eventually earn (if Tesla ever does turn profitable) worth a little bit less to them.