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Tesla stock tumbles into sixth day as analysts cite ‘major hurdles’

MarketWatch logo MarketWatch 5/22/2019 Claudia Assis

Elon Musk wearing a suit and tie standing in front of a building: Tesla Chief Executive Elon Musk in New York in April. © Bloomberg News/Landov Tesla Chief Executive Elon Musk in New York in April.

Tesla can’t seem to catch a break.

Analysts at B. of A. Merrill Lynch and Citi were the latest to air concerns about the company and the trajectory of shares, which were again in the red Wednesday after a string of closes at 2 1/2 year lows.

Tesla (TSLA) stock barely held above $200, down 2% as its losing streak entered a sixth session. 

Much of the pressure on Tesla stock is a result of short sellers pressuring the shares as they were already “breaking down,” analysts at B. of A. Merrill Lynch said in their note Wednesday.

Short sellers’ interest in Tesla is approaching a two-year high, around 29% of the float, the B. of A. analysts said.

“In our view, this could set up for a short squeeze in the coming days/weeks/months should deliveries, profits/losses, cash flow/burn come in even slightly better than draconian expectations, or should Musk introduce another business venture and/or longer-term financial target that once again gets bulls excited about the story,” they said.

Tesla fundamentals have deteriorated, the analyst said, with deliveries and production “that are starting to stall as well as losses/cash burn that are not turning a corner on a sustainable basis.”

See also:Tesla stock falls nearly 8% after reports of ‘hard-core’ plan to slash costs

“Major hurdles” for Tesla include the ongoing Model 3 production ramp and challenges associated with expanding its product lineup with the Model Y, Tesla Semi, and new Roadster; a “very material” cash burn in coming quarters pressuring liquidity, and a “faster-than-usual spike and burnout pattern for Model S/X and now potentially Model 3,” the analysts said.

Tesla’s $2.7 billion capital raise, along with a loan from a Chinese bank and Model Y reservations cash are “good steps” that could put liquidity concerns to rest for now and buy additional time for the company, they said.

“However, (Tesla’s) pathway to becoming a self-funding entity is still unclear. As such, we continue to question (Tesla’s) longer-term profitability, cash flow, and valuation,” the analysts said, keeping their rating on the company shares at the equivalent of sell.

Analysts at Citi echoed such concerns, and also lowered their price target on the shares to $191 from $238 and set their Tesla “bear case” as low as $36.

They also assigned a higher probability, 40% from a previous 35%, for that “full bear” scenario, and lowered the probability of a “full bull” scenario (shares at $760) to 5% from 10%.

Analysts at Morgan Stanley caused a stir Tuesday when they set their worst-case scenario on Tesla at $10.

The Citi analysts kept their sell rating on the stock, citing “lingering” demand and cash flow concerns, Model S and Model X recent price cuts, and risks in China.

“The recent capital raise was a positive step but won’t necessarily get the balance sheet out of the woods if Tesla cannot achieve FCF targets. So the recent reported internal memo, which seemingly called into question prior guidance, didn’t help the risk/reward calculus,” they said.

“The implications can be serious, since an auto maker’s balance sheet is always subject to the confidence “spiral” risk. Good or bad, we think it’s important for the company to provide a more formal guidance update sooner than later,” the Citi analysts said.

Tesla’s claims that it would have a fleet of robotaxis by late next year “ultimately hurt credibility,” the Citi analysts said. “We appreciate the culture of aiming high (which might also attract talent),” the full-mobility claims may have masked a more attainable path for Tesla’s driverless cars, they said.

“We continue to view the opportunity as real & large, but Tesla needs a more tailored AV network deployment plan,” they said.

Tesla shares have lost 28% in the past 12 months and 40% so far this year, contrasting with gains of 5% and 14% for the S&P 500 index (SPX) in the same periods.

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