Tesla's (TSLA) Outlook Better-Than-Feared But Pacific Crest Still Sees 'Plenty of Risk'
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Pacific Crest maintained a Sector Weight rating on Tesla Motors (NASDAQ: TSLA). Analyst Brad Erickson described the company's outlook as better-than-feared, but he remains cautious given soft Model X reservations and risk around its production ramp.
"Lowered delivery forecast is better than feared, but plenty of risk remains," said Erickson. "Consistent with our expectations, the company lowered its 2015 delivery outlook by 1,500 cars at the midpoint and saw a sequential reduction in R&D for the first time in over a year, which was positive. Still, we continue to believe that execution and financial risk surround Model X’s ramp, as evidenced by the company deciding to take middle-seat production in-house after a supplier saw material constraints. In the event that X sees further difficulties, the swing in cash flows could be several hundred million to the negative, which, given the company has burned $3.7 billion over the past seven quarters, could create incremental pressure."
The analyst continued, "We are lowering estimates slightly. We are lowering our revenue and EPS estimates on slightly lower volume and ASP assumptions partially offset by better gross margin from a slower Model X ramp and better expense controls."
Erickson added, "Should Tesla need to become a 500,000 cars per year company in five years? We ask the question given the execution challenges for Model S and X and the cash burn over the past year. Our fair-value estimate of $283 gives the company credit for roughly 471,000 cars in 2020. However, given the inevitable challenges of ramping to such large volumes in the future, further struggles around Model X could result in a significant re-rating of the stock downward at some point simply based on lower assumed volume and profitability. We remain a believer in the longer-term trajectory for now, but any signs of further production challenges and/or waning demand for either Model S or X could make it difficult to argue against such a re-rating. We remain Sector Weight."
Shares of Tesla Motors closed at $208.35 yesterday.
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