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Negative Analyst Notes Both Hurt -- and Help -- Tesla Stock

By Rich Smith – Jun 21, 2019 at 2:17PM

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Tesla bears dominated the headlines yesterday. Today, the bulls got a chance to weigh in.

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...

Just one day after Tesla (TSLA 10.97%) got rocked by a pair of analysts reiterating their sell ratings -- sending the stock down 3% -- shares of the world's most famous electric-car maker are mostly sidelined today on apparently conflicting reports from two more analysts.

Let's find out why.

Red Model 3 as seen from above

Image source: Tesla.

What happened yesterday

Uniformly negative notes out of RBC Capital and Goldman Sachs torpedoed the stock's recent rally. From the first trading day of June through Wednesday, Tesla -- which had been under pressure on worries of flagging demand for its Model 3 sedan -- surged 26% higher as investors began taking to heart CEO Elon Musk's prediction that Q2 2019 could see Tesla report "the highest deliveries/sales quarter in Tesla history!"

But contradicting this optimistic tone, on Thursday RBC warned that in fact, "2Q19 total deliveries may come in toward the low-end of guidance." Furthermore, as relayed by (subscription required), in reaching for even the lower end of its guidance, "TSLA is sacrificing profitability to focus on unit growth."

Meanwhile, fellow investment banker Goldman Sachs attacked Tesla from an entirely different direction: Conceding before the fact that "2Q19 should be fine," Goldman shifted its fire to the second half of this fiscal year, warning that "2H19 (and beyond) volume estimates look high considering there are fewer levers to pull to stoke demand going forward."

Investors predictably panicked, and Tesla stock fell 3%.

What's happening today

And yet, bad as these two reports make things sound, other analysts are a bit more optimistic on the Tesla front -- with one even finding silver linings around the cloudier forecasts.

Today, R.W. Baird reiterated its outperform rating on Tesla stock, and raised its price target a bit (from $340 to $355). Its reason: "[W]e think expectations have overshot to the negative and we believe there are several catalysts upcoming which could drive shares higher (beginning with the upcoming delivery release)." Moreover, in an apparent reference to the previous day's notes coming out of RBC (criticizing Tesla's profits) and Goldman (downplaying Q2 deliveries), Baird observed: "[W]e have noticed bear arguments have pre-emptively shifted from demand to profitability."

The apparent implication: As Tesla knocks down the negative arguments against it, one by one, bears are having to cast about in search of new things to complain about the company. Taking the opposite view, therefore, RBC suggests that "[a] solid Q2 delivery announcement could set up a positive cash flow quarter and set the stage for share appreciation in 2H:19."

A second analyst chimes in

Indeed, even the "bad" news we're seeing today is starting to look pretty good for Tesla. Simultaneous with Baird's price target hike, peer analyst Jefferies lowered its price target on Tesla. And yet, going from $400 down to $300, Jefferies ended up with a price target not too far off from what Baird set.

Nor was Jefferies' note on lowering its price target even terribly negative in tone. Rather, citing findings from a recent visit to Tesla's Fremont factory, the analyst expressed confidence that "industrial efficiency [is] improving" (addressing the profitability complaint) and even worries about Model 3 demand seem "excessive."

While Jefferies does cut its estimates for the company, therefore, hypothesizing that "[f]inancial performance should remain volatile in coming quarters," longer-term, the analyst says it sees "value in Tesla's technology lead (powertrain and AV development) and focus on increasingly affordable price points."

The upshot for investors

So what are investors to make of all these conflicting opinions on Tesla? Here's my take:

Everyone's hedging their positions on Musk's innovative electric car company. Analysts -- even the bears -- seem wary of predicting that Tesla will miss on its delivery numbers at a time when the CEO himself is predicting "the highest deliveries/sales quarter in Tesla history!" That's a bold prediction to make, and it seems unlikely Musk would clamber out on a limb and make it when he knows the company will have to confirm or deny his prediction in just a couple weeks.

(Last year, Tesla reported its Q2 deliveries on July 2 so, logically, we should see the latest report also arrive in the first week of next month.)

With that catalyst on the horizon, Tesla bears are shifting their warnings to the quarters that will come after Q2, downplaying the significance of a "delivery beat" in July, and harping on the company's profits numbers.

While that may seem like a disingenuous argument, however, it's not entirely unfair. After all, even if Tesla's operating and net profits have shown strength lately, data from S&P Global Market Intelligence show that its gross margin has been steadily declining for years as the company shifts to emphasize the sale of cheaper Model 3 cars instead of pricier Model S and X units.

The simple truth of the matter is that, whether you love Musk or hate him, and whether Tesla "beats" or "misses" on deliveries, the real sine qua non for Tesla stock becoming a winning investment is its ability to earn consistent profits. The company failed to meet that standard in Q1. Tesla fans need to hope it does a better job in Q2.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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