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...
Something curious is happening on Wall Street. This morning, analysts at stock research house Consumer Edge announced they're downgrading shares of Tesla (NASDAQ:TSLA) from outperform to equal-weight. And yet, on balance, Tesla's stock ratings on Wall Street still look better than they did just a couple weeks ago.
The reason: At the same time as tiny Consumer Edge begins warning investors that Tesla is "range-bound," two much bigger names on Wall Street have ceased cautioning investors about Tesla altogether.
Here's what you need to know.
Let's start with today's news: Consumer Edge Research, a "preeminent equity research and alternative data insights boutique," announced it's lowering its rating on Tesla stock one notch and cutting its price target, too.
With shares near $310 when the market closed yesterday, give or take, Consumer Edge argues that Tesla stock will be "range-bound for the foreseeable future" because of public relations snafus and SEC issues surrounding the recently announced efforts to take Tesla private. Simply put, the analyst doesn't see Tesla stock going either up or down until these PR and regulatory matters get resolved. Consumer Edge sees less opportunity for Tesla stock to rise to its old price target of $385 per share, and believes it will be "boxed-in" around $311 a share instead.
Hence the downgrade.
Not downgrading Tesla (but not upgrading it, either)
Meanwhile, elsewhere on Wall Street the news looks more positive for the electric-car maker, and one of the reasons for this is...Goldman Sachs.
Yes, Goldman Sachs. You may recall that back in February, Goldman Sachs announced it was once again going negative on Tesla and cutting its rating to sell. In April, with worries rising that the company would fail to achieve its self-imposed goal of producing 5,000 Model 3 electric sedans by the end of June, Goldman publicly reiterated its sell rating. (Tesla did, in the end, succeed in hitting this target.)
And then Goldman Sachs reiterated its sell rating again on Aug. 8, as noted by StreetInsider.com (subscription required). But just one week later, Goldman dropped a bombshell: The analyst removed its rating from the stock, switching it to "Not Rated." As Goldman explained in a note to clients, "a matter that is fundamental to the reasonable analysis" of Tesla stock prevented the analyst from continuing to publicly opine on its prospects. To wit: Tesla had just hired Goldman Sachs to advise it on its going private transaction.
So scratch one sell rating.
Make that two
Then, today, a second bombshell: In what looks like an echo of what happened at Goldman, this morning investment banker Morgan Stanley announced that it, too, was moving Tesla stock into the "Not Rated" category.
Now mind you, it's not certain that Morgan Stanley is now also advising Tesla. Alternative theories include an analyst departure forcing Morgan to temporarily suspend coverage of Tesla, or an analyst simply deciding the situation with the stock is too unpredictable, and dropping coverage until visibility improves. Either of those two scenarios would just as easily explain why Morgan Stanley is no longer assigning a rating to Tesla. Still, the timing of Morgan Stanley's move is curious, and suggests the possibility that Tesla has hired Morgan Stanley to help it go private.
What it means to investors
Whatever the reason, the net effect of Morgan Stanley's move is to remove a second uncomplimentary analyst rating from Tesla's scorecard and make the stock look more attractive to individual investors as a result. (Morgan Stanley had previously rated Tesla stock only equal-weight, the same rating to which Consumer Edge downgraded it today.) Combined, the removal of Goldman's sell and Morgan Stanley's neutral rating from Tesla stock outweigh the effect of today's downgrade by Consumer Edge.
But what does any of this mean to you, the individual investor?
I think the obvious answer here is: Not much. The fact that certain Wall Street analysts have changed their opinions on Tesla certainly doesn't mean you must change your opinion. The more so when the motives of two of the analysts changing their (publicly espoused) opinions may have been motivated by money -- specifically, the receipt of fat retainer fees from Tesla.
Rather, I think you should focus instead on the money that Tesla itself is earning. In its Q2 earnings report, Tesla said it's still on track to earn GAAP net profits in both Q3 and Q4 of this year, and continued to insist it will not need to raise new cash to fund its growth. If that forecast comes true, then I suspect Consumer Edge's prediction that Tesla will remain "boxed-in" and "range-bound" will be proven false -- and Consumer Edge will be wrong to have downgraded Tesla stock.