Tesla Analysts Want to See More Before Joining Stock Party

(Bloomberg) -- Tesla Inc. investors are cheering the company’s best-ever quarter with the shares of the company climbing in early trading, but Wall Street isn’t yet ready to drop its cautious stance.

While the third-quarter results were definitely “impressive,” and spurred at least one upgrade to outperform at Wolfe Research, most analysts questioned whether the profit and robust cash flow were sustainable and can be repeated next quarter. Demand for the company’s electric cars in a post tax-credit environment also remains a lingering concern.

Tesla shares pared gains to about 4.7 percent after rising as much as 11 percent earlier to its best intraday price since Aug. 27. Here’s a roundup of analyst commentary following the results.

BofAML, John Murphy

Tesla’s better-than-expected third-quarter results are reminiscent of the third quarter of 2016, in which transitory factors helped to drive positive earnings and cash flow, although those were not sustainable, and “is likely the same case now.”

Tesla is “caught between a rock and a hard place,” in which further unit growth at higher-average selling price (ASP) is likely limited, while expansion of volumes into lower ASP will likely be materially dilutive to margins.

“If Tesla is successful in pushing volume, it would likely evolve into none other than a lower-margin automaker.”

Underperform, price target $200.

Goldman Sachs, David Tamberrino

“We question if this is not as good as it gets from a near-term upside surprise for shares.”

With the exposure to China tariffs on imported components, and likely headwinds to mix as lower price point vehicles are offered, automotive gross margins may compress sequentially into fourth quarter, and could see further mix pressure into 2019 as the U.S. Federal Tax Credit begins to phase out for its vehicles.

Sustainability remains in question.

Sell, price target $225.

Cowen, Jeffrey Osborne

Management walked back its 10,000/week production target and instead focused on hitting 7,000, which could lead to lower production estimates from the Bulls for 2019-2020.

Cash improvements bode well for short term debt repayments, but remains concerned about competition, long-term capex needs & valuation.

Continues to question the U.S. demand for the Model 3 in a post-tax credit environment. Says customers waiting for the $35,000 version of the Model 3 are subject to high degrees of price sensitivity relative to customers in the mid-sized premium sedan market.

Underperform, price target $250 from $200.

Morgan Stanley, Adam Jonas

Following the strong results, increases the value of the core Auto business by 12 percent to $220/share. Reduces the discounted cash flow valuation of Tesla’s shared mobility business to $71/share from $95/share previously, allowing for a slower ramp and increasing competition from peers.

Raises forecast for fourth-quarter GAAP operating margin to 5 percent from 1.6 percent previously, driven by the higher third-quarter base effect and 64,000 units of Model 3 in fourth quarter, or about 5,300/week.

Equal-weight, price target $291.

RBC, Joseph Spak

Strong third quarter across the board helped by Model 3 mix. Results may be sustainable near-term while Tesla figures out how to unlock lower-end Model 3 demand profitability.

Tesla may have crossed the line to become self-funding, which would be another clear positive. Expects positive momentum.

Sector perform, price target $325 from $315.

Jefferies, Philippe Houchois

On all metrics, third-quarter results comfortably beat the high end of consensus and quality looks rather good.

Third quarter materially de-stresses Tesla’s balance sheet and could support more leverage if the company can demonstrate more than one quarter of healthy free cash flow generation and sustained demand for Model 3.

Hold, price target $360.

Baird, Ben Kallo

Tesla reported a Model 3 gross margin of 20 percent, which significantly exceeded Baird’s expectations.

Strong free cash flow of $881 million bolsters Tesla’s balance sheet and should be sufficient to allay investor fears over cash burn.

The flip to profitability in third-quarter could be the start of a narrative shift, as the market focuses on earnings and free cash flow generation potential.

Outperform, price target $411.

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