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Analyst Blog

On Nov 14, 2013, we downgraded Tesla Motors, Inc. (TSLA - Analyst Report) to Neutral from Outperform. The downward revision was based on its continued losses, production constraints, high prices and mounting research and development (R&D) and selling, general and administrative (SG&A) expenses.

Why the Downgrade?

Estimates for Tesla have been declining ever since it reported third quarter results on Nov 5. This electric carmaker logged an adjusted loss (including stock-based compensation expense) of 4 cents per share, which was narrower than a loss of $1.04 recorded in the year-ago quarter and compared unfavorably with the Zacks Consensus Estimate of break-even results.

In the last 30 days, the Zacks Consensus Estimate for Tesla’s 2013 earnings has plunged 95% to 1 cent per share. The Zacks Consensus Estimate for 2014 has also declined 63% to 58 cents per share.

Cause for Concern

Despite increasing sales, Tesla still remains a loss making company. Although it recorded profit for the first time in the first quarter of 2013, it failed to sustain it in the second quarter and recorded a net loss (on a reported basis) of 26 cents per share. Even in the third quarter, Tesla witnessed loss on both adjusted and reported basis.

Tesla is currently facing a shortage of lithium-ion battery cells due to which it is unable to meet the rising demand for Model S. This production shortfall is being cited as one of the main reasons for the company’s weak third-quarter results.

Another factor affecting Tesla’s results is high R&D and SG&A expenses. The company is investing significantly for product development and expansion of its supercharger network. R&D and SG&A expenses are expected to sequentially increase 25% and 20%, respectively, in the fourth quarter of 2013.

However, on the positive side, Tesla is witnessing growing sales on its products’ strong performance and impressive design. Moreover, the company has large automakers like Toyota Motor Corp. (TM - Analyst Report) and Daimler AG (DDAIF) as clients for its electric powertrains components. Higher vehicle deliveries, sale of electric powertrain components and increase in average selling price of cars is driving revenues.

Tesla is also actively undertaking international expansion and working toward expanding its product portfolio to boost sales. Although the company is yet to generate sustainable profits, it is well placed to gain from these positives.

Tesla currently carries a Zacks Rank #3 (Hold). Another automaker Ford Motor Co. (F - Analyst Report) is worth considering at present, with a Zacks Rank #1 (Strong Buy).

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