Tesla
picked up a new bearish rating that helped send the stock lower in Thursday trading, but given the magnitude the drop, other factors are at play.
Wednesday evening, HSBC analyst Michael Tyndall launched coverage of Tesla stock (ticker: TSLA) with the equivalent of a Sell rating. His target for the stock price is $146, down about 34% from recent levels.
The issues appear to be valuation and how investors tend to view the company. “Tesla is more than a very expensive auto company; its ambition is to be an innovator, which underpins the valuation,” wrote Tyndall. A “Charismatic CEO with a cultlike following feeds into the innovator narrative, but timing of delivery is far from certain.”
Simply put, the electric-vehicle business isn’t worth what Tesla stock trades at today. What is more, Tesla’s other businesses, including energy storage, self-driving cars, robots, and artificial-intelligence computing, all face regulatory hurdles that mean slower-than-expected growth in the future, he said.
Tesla stock is worth some $700 billion at current prices. At HSBC’s target price of $146 a share, the company’s market capitalization would be closer to $470 billion.
Shares were down 6.4% in midday trading at $207.94, while the
S&P 500
was down 0.6%, and the
Nasdaq Composite
was off 0.7%.
Coming into Thursday trading, Tesla stock was down about 8% over the past three months. Investors are worried about slowing demand for EVs. Global battery-EV sales rose roughly 25% year over year in the third quarter, but that is a slower rate than earlier in the year. More EVs are available for sale now, all vying for market share.
Fears over an EV slowdown are also a likely factor in Thursday’s drop. EV start-up
Polestar Automotive
(PSNY) effectively cut its long-term guidance Wednesday evening. It wants to ship about 160,000 cars in 2025, down from a prior goal of about 290,000 units. Polestar shares were down about 8% in midday trading Thursday.
A new Sell rating doesn’t change the Buy-rating ratio for a stock. Overall, about 43% of analysts covering Tesla rate shares at Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%.
It does change the Sell-rating ratio, though. About 15% of analysts covering Tesla rate shares at Sell. The average Sell-rating ratio for S&P 500 stocks is close to 5%. It is low because analysts typically shy away from Sell ratings, instead assigning Hold ratings to stocks they don’t favor.
The average analyst price target for Tesla stock is about $239. Among analysts who rate the stock at Buy, the average target price is roughly $290. Among those who have it at Sell, the average is about $120.
Tyndall said his target price is based both on where other tech stocks trade as a multiple of per-share earnings and on a discounted cash flow model. A DCF projects cash flows far into the future and discounts them to a value today using a return acceptable to an investor.
Both valuation methods are common on Wall Street. Tesla stock is trading at about 57 times estimated 2024 earnings, though what companies the EV maker should be compared with is an open question. The average forward price/earnings ratio for the Faang stocks and
Microsoft
(MSFT) is about 26.
Complicating the picture is that all those companies are expected to grow at different rates. Growth always affects P/E ratios.
Write to Al Root at allen.root@dowjones.com
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