Strange that 11M+ shares changed hands with TSLA green, and an hour later volume is at 13M and we're -$10. Seems irrational.
Likely a result of TSLA sell-side mega bull downgrading just based on valuation.
Tactically downgrading to a Neutral rating, raising price target to $525. We are moving to the sidelines, admittedly battle-weary after a hard-fought several years, including ~20% outperformance over the last year. We think risk/reward is more balanced following recent stock appreciation; expectations (particularly on the buyside) appear to be fairly calibrated and we think the positive estimate revision cycle is in its latter stages. That said, we would not short the stock and remain positively biased over the long run.
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After several years at an Outperform rating, which included contentious arguments with (evidently) high-conviction bears, we recommend profit- taking. While we remain constructive on TSLA’s long-term prospects, we now believe estimates are properly calibrated (particularly on the buy-side) and valuation appears more balanced. Admittedly battle-worn after a contentious two- year period (reach out to hear our best stories) we will wait for further execution to get more positive on the name.
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We would not be short the stock; even the most purportedly sophisticated short theses have been proven incorrect over our near decade of coverage. While we are tactically Neutral as TSLA works to execute and meet (elevated) investor expectations, we do not believe the stock is a long-term short. Despite (overly dynamic) short arguments since inception, the company has continued to grow and execute (albeit on a slower timeline than projected, at times); we expect this will continue.
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Shares now fairly reflect future execution, in our view, including a smooth Model Y ramp; while this is certainly achievable, we believe there is some risk (as with any product launch). While there are many variables which can swing profitability higher/lower, we do believe TSLA is in the latter stages of the positive estimate revision cycle. We think the stock is pricing in a smooth Model Y ramp; while possible there is always a risk with new product introductions. Separately, we think there is a near-term risk from one-time margin impacts (particularly related to China) and/or seasonality, which could impact Q4:19/Q1:20 results.
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While we think risk/reward is more balanced at current levels, we do see some upside risk and it is possible TSLA surpasses (raised) estimates. The company does have several levers which could drive better-than-expected results, including: 1) better-than-expected volumes from Shanghai and/or Model Y, 2) stronger gross margins, and 3) continued OpEx management. See details section for more information.
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Tactically Neutral and battle-worn after a contentious several years (including ~20% outperformance vs. the S&P 500 LTM), but we remain positively biased over the long run. We are moving to the sidelines for the near term, but continue to like TSLA’s long-term prospects. We view the name as a major disruptor in the auto/energy industries, and think new product introductions, production ramps, and further development of innovative technologies will drive growth.
