With their Q2 Earnings coming soon, Wall Street’s faith in Tesla is waning

  J.P. Morgan recently set a new price target for Tesla Motors. Its low, lower than GE’s 5yr return. The firm predicts a 42% decrease in share price by the end of 2018, placing its price target at $180 per share. The analyst responsible for the report, Ryan Brinkman, cited competitors pricing “their electric cars aggressively” as one of the main reasons for the low price target. The concern here is that larger, more financially stable automakers will produce and price their own electric cars not as actual product lines, but as a way “to subsidize their more lucrative internal combustion engine portfolio vehicles from a legal, regulatory, and compliance perspective“. Using this strategy, competitors such as GM could price their respective e-vehicles at a low margin or even slight loss, and undercut Tesla’s pricey portfolio. Brinkman also states in his report that Tesla has a “highly differentiated business model, appealing product portfolio, and leading-edge technology, which we believe are more than offset by above-average execution risk and valuation that seems to be pricing in a lot.“ Essentially he’s saying that while Tesla makes cool and unique stuff, that’s really all it is, and we couldn’t agree more.

   Tesla has three things going for it: a celebrity CEO with an almost cult like following, leading market share, due to being the first major player in the undisputed future of transport, as well as super cool multi award winning products. Tesla’s Model S has exceptionally high reviews on every automotive site, and the X has received wonderful reviews as well. The Model 3 actually failed to be recommended by consumer reports due to poor braking, UNTIL Tesla DOWNLOADED via internet a software update that completely upgraded the braking performance, which resulted in Consumer Report changing their mind and recommending the Model 3. Now we don’t know about you, but that’s one of the coolest things we’ve seen since Odell Beckham Jr caught a football behind his head with one hand.

   With all this going for it, it becomes a little more understandable why Tesla is the 3rd largest automaker by market cap at 54.37 billion as of Friday. It lags barely behind GM, whose current valuation is 55.39 billion and Toyota, who is worth a colossal 215 billion. Yeah, we were surprised too. However, it’s in Tesla’s standing compared to other, more established automakers where the problems arise. On the surface Tesla looks beautiful and fairly valued, but when you really look at the numbers, the degree of overvaluation is apparent. Of the top five largest automakers by market cap, Tesla is the only one with negative earnings, at about $-9.65 per share. The below charts rank the top 5 automakers first by market cap, then by 2017 revenue (or equivalent, as Japanese fiscal years are slightly different than US or Canadian) and finally by 2017 earnings.

The top five largest automakers ranked by market cap, revenue and earnings

   Two important things to note from this chart. The first being the massive discrepancy between Tesla’s various earnings and profits from both their market cap and the other automakers. Secondly, GM’s major earnings loss, which can be attributed to a one time income tax expense which accounted for 97% of their pre-tax income, and a significant loss totaling 4.21 billion due to discontinued operations. Such expenses while larger than the line at Tim Hortons, are luckily a one time expense, more specifically the income tax expense.

   Regardless of outlining expenses, the chart clearly represents Tesla’s financial lag in comparison to the other 5 largest automakers. Finally, it is also important to remember that Tesla has never made money. Ever. Except for 2 non-consecutive quarters. With their Q2 earnings coming up on August 1st, we are excited to see what they might have in store.