What: Shares of electric vehicle manufacturer Tesla Motors (NASDAQ:TSLA) sank more than $3 in Friday's trading session following a price target cut from research firm Barclays.
So what: According to covering analyst Brian Johnson, who kept his firm's rating of Tesla Motors unchanged at "equal weight" (the equivalent of a "hold"), there are "many challenges" ahead for the innovative electric vehicle manufacturer. Specifically, Johnson lists margin expansion and Tesla's ability to ramp up production as one of those challenges. However, he lists a "new era of low oil prices" as being particularly troublesome for Tesla since high gasoline prices are one reason consumers push toward EVs and other fuel-efficient hybrids.
Ultimately, Johnson wound up reducing his firm's EPS estimate in 2020 to $5.55 from $13.54, and lowered Tesla's price target 9% to $200 from $220.
Now what: The real question that needs to be asked here is whether or not this downgrade makes sense.
To ensure I don't hide any biases, I'll admit to being one of the brave (and thus far wrong) souls who's currently short shares of Tesla Motors. A lot of what Johnson had to say with regard to Tesla hits home with me, as I've previously expressed concerns over Tesla's valuation.
Some key points that continue to trouble me are Tesla's inability to stick to its production deadlines (both the model S and the X were delayed from their original launch dates), CEO Elon Musk's recent commentary that Tesla wouldn't be profitable based on generally accepted accounting principles until 2020, and the company's plans to open a Gigafactory to internalize the production of its EV batteries. Tesla has next to no knowledge of the battery production process, so there's no guarantee this foray will be a success.
On the other hand, I have to give Musk credit for introducing the first new auto brand in more than 50 years. Additionally, the dynamics of the oil market may not have as much bearing on the sale of the Model S as you might initially think. With the Model S regularly running $70,000 or higher, the typical buyer isn't purchasing it to save $80 in fuel costs each month. Also, the infrastructure supporting EVs is growing, making owning an EV a smarter and eco-friendly choice.
But, as I clearly mentioned above, I'm a short-seller of this stock. Its valuation is terrifying and mystifying to me considering that most auto giants can produce in a few days what Tesla is forecasting it will build in the entirety of 2015. I also suspect it'll face some tough competition from the likes of BMW and General Motors toward the end of the decade. Long story short, I agree with Barclays' price target cut on Tesla.