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...
Timing may be everything, but there's such a thing as being too clever when timing a stock rating.
This morning, analysts at Vertical Group announced they're initiating coverage of Tesla (TSLA 2.90%) stock with a sell rating, and at first glance, their timing looked pretty good. After cratering as low as $252 a share early this month in response to news that Tesla had just missed its production target for the Model 3 sedan (yes, missed it again), Tesla shares bounced back to nearly $306 last week as investors twigged to the fact that Tesla Model 3 deliveries are eclipsing sales of General Motors' (GM 8.91%) rival electric car, the Chevy Bolt.
Vertical Group appears to have viewed that rebound as an invitation to tag Tesla stock with a sell rating and an $84 price target.
But that might have been a mistake.
Good news, bad news, good news
Shortly after Vertical's sell rating was reported on StreetInsider.com (requires subscription), news broke that seems likely to keep driving Tesla stock forward. As reported by CNBC, Chinese President Xi Jinping conceded a key sticking point in the brewing trade war with the Trump administration, saying in a speech that China will lower the 25% import tariff that it charges on U.S. automobiles.
As CNBC reports, Xi said, "We have a genuine desire to increase imports and achieve greater balance of international payments under the current account." In evidence of which, Xi is promising to "significantly" reduce import tariffs on U.S. cars and trucks -- including Tesla's electric cars.
This news has helped to lift Tesla stock more than 4% in early Tuesday trading already (GM and Ford stocks are benefiting as well) -- despite the new sell rating from Vertical Group.
A distinction with a difference
None of which means that Vertical Group is wrong to rate Tesla stock as sell, mind you -- just that it's tough to time a buy/sell call on a stock as volatile as Tesla.
Fact is, there are many reasons to think that tiny Vertical Group might be onto something when it waves the red warning flag around Tesla stock. For one thing, the same Model 3 production news that helped to lift Tesla stock last week -- reports that Tesla had grown Model 3 deliveries from 30 units nine months ago, to 2,000 units per week today -- may be missing a crucial point. Despite growing Model 3 production 67-fold in less than a year, Tesla is still running far short of its promised performance level of producing 5,000 Model 3 cars a week.
Tesla remains still well short of crossing even the halfway mark toward hitting its production target. If Q2 2018 rolls around and Tesla fails to hit its mark again, there's every possibility that investors will rebel and sell off Tesla stock, proving Vertical Group correct in its pessimism.
Misery loves company
Nor is Vertical the only analyst expressing its pessimism over Tesla today. Soon after Vertical's new sell rating came out, Goldman Sachs reiterated its own sell rating on Tesla stock, and cut its price target on the shares to $195.
Goldman Sachs worries that Tesla is unlikely to hit its 5,000-unit-per-week goal by the end of this quarter (just two months away). In fact, according to a write-up on TheFly.com today, Goldman Sachs is predicting Tesla will most likely maintain only a 1,400-unit-per-week rate of Model 3 production. The analyst also warns that "Model S/X demand will likely be challenged going forward with the phase-out of the U.S. EV tax credit in 2H18" (which could be a real problem, as those luxury electric models are believed to generate higher profit margins for Tesla).
On top of everything else, despite CEO Elon Musk's assurances that Tesla's finances are in order and that it has no need to raise additional funds, the analyst is predicting that before 2018 is out, Tesla will have to return to the capital markets seeking more debt or issuing more shares -- diluting existing Tesla shareholders in the process.
The upshot for investors
And there you have it folks. Tesla stock that costs nearly $300 a day could fall by more than one-third (according to Goldman Sachs) or more than two-thirds (according to Vertical Group) within a year. Yet news of China's tariff move is trumping these negative ratings and lifting Tesla stock higher.
Are investors simply whistling past the graveyard here, or is the China news good enough to negate the negative factors cited by the analysts? That's really hard to say, because when you get right down to it, here's the hard truth for investors in Tesla stock:
With no profits and no free cash flow to base a valuation on, it's all but impossible to say what price is right for Tesla -- $84 a share, as Vertical Group projects, the $195 price that Goldman Sachs assigns the stock, or the more than $302 a share that investors are bidding as I write these words. Until Tesla earns a profit, and allows investors to hang at least a price-to-earnings ratio on its stock, every estimation of Tesla's worth is little more than guesswork.
And with analysts now predicting it will be 2020 before Tesla earns its first full-year profit, this stock is likely to keep us guessing for a long time more.