Elon Musk's electric carmaker Tesla Inc. (TSLA), once regarded as one of the most glamorous tech companies, has completely missed the bull rally in 2019. Shares of the company have fallen nearly 30% this year through May 1, to their lowest level in more than two years as the S&P500 surges to new highs. Now, Tesla could face more declines as Wall Street market watchers indicate that it may have to raise billions of dollars to cover its losses, as outlined by Barron’s.

Hard Times for Musk’s EV Maker

  • Musk’s ongoing battle with the SEC
  • Tesla’s plunging credibility as a borrower
  • Sentiment on the Street falls to all-time lows
  • Tesla shares at 2-year low
  • Q1 earnings and Model 3 production targets fall short of forecasts
  • $700 loss wider than expected, even when aided by “significant spike” in emission credits

Source: Barron’s

Q1 Earnings Fall Short, Even with Surprise Boost

Soaring yields illustrate Teslas' plunging credibility as a borrower as confidence on the Street falls to a low. High-profile CEO Elon Musk’s ongoing battle with the SEC has done little to brighten sentiment around the once red-hot stock. Tesla saw its shares plummet after missing earnings and Model 3 production targets last week, when it posted a loss of $700 million for the quarter. Delivers fell 31% from the previous quarter, while Musk largely ignored questions regarding demand and remained steadfast in his forecasts for the upcoming year.

In addition to disappointing with a wider than expected than expected loss in the recent quarter, Tesla's latest 10-Q suggests that its dismal earnings may have been even worse if they had not been inflated by a big "spike" in non-ZEV credits, according to Bernstein analyst Toni Sacconaghi and other market watchers.

As opposed to ZEV credits which are emission credits used by California and nine other states, non-ZEV credits are other emission credits which Tesla can sell to companies that produce too many cars with emission. Sacconaghi, one of Tesla’s longtime bulls, noted that the increase may have come from a deal with Fiat Chrysler, although the reason is less important that the material impact. Without the the $216 million auto-energy credits, Tesla would have experienced a quarterly loss of around $900 million, as reported by Business Insider. Gross margins on the Tesla Model 3, the company’s first mass market vehicle, would have been 15% excluding all credits, compared to the 20% that was reported.

“The fact that Tesla did not report / discuss the impact of non-ZEV credits to automotive gross margins on last week’s earnings call is likely to raise further eyebrows among investors,” said the Bernstein analyst.

Despite Sacconaghi’s more downbeat comments, he still expects Tesla stock to gain nearly 40% over 12 months from current levels to reach a price target of $325. He maintains a market-perform rating on shares of the EV market pioneer.

“On the one hand, current sentiment strikes us as perhaps overly negative, with the stock now below its historical 2-year trading range,” wrote Sacconaghi. “On the other hand, we still need to gain conviction on normalized gross and operating margins—relative to demand elasticity—to get more constructive over the long-term. With that in mind, these latest data points on non-ZEV credits are incrementally sobering.”

Looking Ahead

While Tesla’s long-standing bull remains hopeful of a recovery for its falling share price, Barron’s is less optimistic. “Support near $240 might be turning into resistance, and sentiment, though bad, could always get worse,” wrote reporter Ben Levisohn.

Moving ahead, Tesla is aiming to make 500,000 total cars in the period from June 30 2019, to June 30, 2020, compared to its previous goal to make the same amount of Model 3s during that time. Musk continues to assure investors that the company will blow it out of the park in the current quarter, which should ease demand concerns as supply issues are resolved with a major supplier.