TSLA Stock: Analyst Reveals the No. 1 Problem with Tesla Motors Inc

 TSLA StockMore Downside in TSLA Stock: Analyst

Tesla Motors Inc (NASDAQ:TSLA) had a good run in 2015, but this year hasn’t been too welcoming. TSLA stock is continuing its rout on the back of fresh downgrades. The latest of these downgrades will likely have the bulls worried.

Adam Hull, an analyst with the European investment bank Berenberg, sees more downside to Tesla stock. He mentions three headwinds that back the reasoning behind his analysis. He’s giving the stock a price target of $165.00, nearly five percent lower than Wednesday’s closing price. (Source: “Tesla (TSLA) Initiated With ‘Sell’ Rating at Berenberg,” Street Insider, February 3, 2016.)

Hull is citing low margins as the reason for his downgrade. According to the analyst, a luxury car manufacturer should be able to achieve higher gross margins. The analyst notes that this is not the case at Tesla.

Excluding government subsidies, Hull estimates Tesla’s gross margins somewhere short of 20%. In contrast, luxury carmakers like BMW and Mercedes boast much higher margins at more than 35%.

Hull appreciates Tesla’s massive growth since its founding days. But he reiterates that low margins make its future hazy.

“While the Model 3 range, presented in late March 2016 and to be delivered from Q4 2017, should be a strong product, we think margins will disappoint,” says Hull.

He further adds, “At this price, we think Tesla is now a play on Model 3’s potential profits—we forecast a gross margin of 16% in 2020, well below the 20% consensus.” (Source: Ibid.)

Margins aren’t the only problem for TSLA stock. The analyst notes that savings on falling battery costs and other cost efficiencies might give some support to margins. But he adds that these three serious headwinds will offset this support:

  1. Strong U.S. dollar with a direct negative effect of 500bp
  2. Revocation of Tesla’s U.S. federal incentive of $7,500 per car before 2019
  3. Low oil prices, making adoption of electric vehicles less attractive


Hull predicts that even in 2020, revenue from the “Model 3” will likely be only $10.0 billion. He believes that the market for electric vehicles (EVs) will likely see positive returns beyond 2025. Until then, even Tesla’s competitors will likely be bearing losses on their EV bets.