Tesla Tumbles as Musk Strategy Shift Widens Bull-Bear Divide

(Bloomberg) -- The swath of initiatives Tesla Inc. unveiled Thursday is either a desperate move or a remarkably savvy strategy to adapt to a difficult market -- depending on who you ask on Wall Street.

The shares slumped as much as 8.8 percent Friday as the perennial debate between Elon Musk’s believers and naysayers intensified after the company laid out plans including a $35,000 Model 3 sedan, price cuts across its higher-end Model S and Model X, the closing of its stores and job cuts. At the same time, the moves mean Tesla probably won’t post a profit in the first quarter, as the company previously expected, although second-quarter profitability is “likely,” Musk said.

“The bears have more material to work with than the bulls,” Morgan Stanley analyst Adam Jonas said, after the carmaker’s announcement drew concerns about the company’s brand power, profitability and demand.

Key details:

  • Tesla introduced $35,000 Model 3, fulfilling a decade-long goal. It will come with a glass roof and some other features that weren’t originally planned, along with 220 miles of range on a single charge.
  • Tesla planning 6 versions of the Model 3, including the “Standard Range Plus” at $37,000 with 240 mile-range, the “Mid Range” at $40,000 with 264-mile range and the top-line performance Model 3 at $58,000.
  • Tesla eliminating in-store sales and closing its stores to help cut average vehicle costs 5%-6%.
  • Musk sees Tesla producing 420,000-600,000 cars this year
  • No longer expects to turn a profit in the first quarter, but sees profitability “likely” in the second quarter.

Read More: Here’s Everything That Just Went Down at Tesla

“Last year featured a number of idiosyncratic events that shaped the Tesla narrative and, just 2 months into 2019, it seems to be another year of significant volatility, driven by both economic factors and company-specific factors,” Jonas wrote in a research note, reaffirming his equal-weight rating. He’s one of seven analysts with the equivalent of hold recommendations for Tesla, while 13 say buy and 15 say sell, according to data compiled by Bloomberg.

While the decision to shift to an online-only sales model may help the company reduce costs, Cowen’s Jeffrey Osborne noted that electric vehicle sales still require some customer education on charging, range and so on that may not be as readily available without an in-store experience.

Tesla shares fell as much as 8.8 percent to $291.90, the biggest drop since mid-January. The stock had run up more than 7 percent in the past two sessions since Musk teased the announcement through cryptic tweets that fueled rampant speculation.

Here’s a round up of analyst commentary after Thursday’s announcement:

Cowen, Jeffrey Osborne

“We see the switch to online sales as a sign the company has been unsuccessful in reducing the production costs of the Model 3 enough to profitably produce it at a $35,000 price, and the plan as a ‘Hail Mary’ in the face of a largely exhausted U.S. demand for higher priced variants.”

“While the $35,000 price is likely to boost demand, the company’s plan to move to a primarily online only model was very surprising and we see it as a serious barrier for a large swath of potential customers as the company looks to enter the ‘mass market.”’

“Electric vehicles currently make up only about 2 percent of global sales, and while we believe that number is likely to grow, we believe there is an education process that is crucial for new customers around charging, range, and other features that are unique to Tesla that will not be as readily available without the in-store experience.”

Rates underperform, price target $200.

RBC Capital Markets, Joseph Spak

“More price cuts supports view of softening demand, lower margins.”

“True, the $35,000 Model 3 was always the goal but offering lower price vehicles is unquestionably a demand lever, meaning demand for the higher-end trims is slowing.”

“Other auto companies do this too - start with a rich trim mix. The difference in Tesla’s case is it remains unclear if Tesla can make money on a $35,000 Model 3.”

Rates underperform.

Bernstein, Toni Sacconaghi

“Given its seeming abruptness, it does not appear that yesterday’s announcement was made from a position of strength.”

“We believe that a $35,000 Model 3 has close to about 0 percent gross margins today, suggesting that these price cuts could materially dilute Model 3 and company gross margins initially.”

Rates market-perform, price target $325.

Morgan Stanley, Adam Jonas

“Tesla significantly increased its efforts to promote the sale of cheaper cars. While this may stabilize the air-pocket in first-quarter sales, we’re concerned it’s a sign of a brand that may be, at the margin, losing its halo of exclusivity.”

“Tesla appeared to raise the required deposit amount to $2,500. If orders jump by 100,000 units (which we believe is possible), that alone can pull in $250 million of cash onto the balance sheet.”

Evercore ISI, Arndt Ellinghorst

Most meaningful driver of the stock on Friday could be the new first-quarter guidance of not “likely to be profitable” versus earlier view of a small profit.

“As always, bulls/bears will both be in an anguished frenzy about the implications of last night’s announcement/press call.”

Rates in line, price target $330.

Consumer Edge, Derek Glynn

“We broadly view these announcements as a positive for unit demand, but negative for (a) average selling prices, (b) mix, and (c) near-term gross margins.”

“Tesla’s main constraint continues to be the rate of production, not unit demand.”

“Tesla’s delivery outlook also implies another year of significant market share gain.”

“Shift to an online-only sales model as a key element of differentiation (particularly for a new car manufacturer) that has the potential to drive higher conversion, reduce costs in the long-run, and improve customer satisfaction.”

Rates equalweight, price target $350.

Baird, Ben Kallo

“We think the update should mitigate demand concerns; the lower-priced variant expands the addressable market and Tesla would not shutter stores if it were struggling to sell cars.”

“We think the overly negative sentiment on demand will start to improve in the coming weeks, which should drive shares higher.”

“We are buyers into the first-quarter delivery release (expected within three days of quarter-end) as we believe weak deliveries are priced in and think the report could be a de-risking event.”

Rates outperform, price target $465.

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