By Roxanne (Yanchun) Liu
Medill Reports
Shares of luxury electric-car manufacturer Tesla Inc. (TSLA) jumped the week after the company reported scaled-up production of its Model 3 sedan in the first quarter, but concerns about product quality and heightened competition have led to Wall Street’s skepticism about Tesla’s long-term stock price.
The Palo Alto, California-based auto maker said on April 3 it produced 2,020 Model 3 cars, its first mass-production affordable electric vehicle, in the seven days ending April 2, slightly missing its 2,500-unit weekly target announced in February. Tesla built 793 Model 3 vehicles in the last seven working days of the fourth quarter, according to a company press release published on Jan. 3
Tesla’s stock reached a 52-week low of $244.59 on April 2, the day before the company’s production announcement. It hit a 52-week high of $389.61 on Sept. 18. Shares closed at $294.08 on April 27.
Some investors doubt whether the Model 3 production increase represented the true-color of Tesla’s capacity in the long run.
“The way they made their number right was to pull people off the other lines in order to put them on [Model 3] line to make the number,” said Scott Kellett, president at investment firm Central Trust Company, who expects Tesla shares to decline 15 percent in the next 12 to 24 months. “They did it by hook or crook in one week does not make a trend.”
Tesla would shut down the production of its two luxury electric cars, Model S and Model X, for two days and encouraged workers to volunteer to work on the Model 3 line, Bloomberg reported on March 29, citing an internal email sent by Peter Hochholdinger, vice president of production on March 21.
Tesla remains the goal to reach the Model 3 production rate of roughly 5,000 units per week by the end of June, the company said on April 3.
“We believe the longer-term bulls care little about what the actual number [of Model 3 weekly production] is – only that it improved,” KeyBanc analyst Brad Erickson, who rates the company’s shares as sector weight, said in a note issued on April 3. “If and as the number continues to climb to something approaching 4,000-5,000, we think Model 3 gross margins should turn profitable, which doesn’t indicate it will meet long-term targets, but should prove to be better than the more bearish expectations of the car being [negative in earnings before interest and taxes], even at scale.”
Tesla would advance its annual production target of 500,000 electric vehicles to 2018, two years earlier than the previous plan, the company said in a release on May 4, 2016. Tesla built a total of 101,027 units in 2017.
Frank Schwope, an analyst at NORD/LB, who has a 12-month target price of $240 on Tesla’s stock and a sell rate, said he doesn’t believe this goal would be achieved.
“It’s always very difficult if you produce only small numbers in the last year and you want to become a big play or mass producer,” Schwope said. “It’s not so easy to get new workers and to get new machines.”
Some analysts and investors are skeptical about Tesla’s long-term share price because they doubt Tesla’s capability of building high-quality cars.
Joseph Spak, an analyst at RBC Capital Markets, slashed his price target on Tesla stock to $305 from $380, according to his note released on April 3.
“Our [Tesla production capability] estimates may have been too aggressive,” Spak wrote, explaining the price target cut. “It’s a test of Tesla’s highly automated production line which is not only a question of removing bottlenecks but also ensuring quality.”
Tesla has been overly relying on robots on its assembly lines and has a group of employees at the end of each line to fix vehicle defects, an approach many American auto companies tried but failed in the 1980s, said Kellett, who has an individual client who owns about 1,400 shares of Tesla.
Japanese auto maker Toyota Motor Corp. (TM) upgraded its assembly system by emphasizing human labor, which beat robots in recognizing complicated flaws in production and allows employees to stop production when they see an issue along a line, Kellett said.
“Tesla doesn’t do that,” said Kellett. “They throw everything together and at the end of the day out comes their vehicles, and by all accounts the quality is poor.”
Tesla announced in March it would recall approximately 123,000 Model S cars manufactured before April 2016 due to a problem in the power steering component.
Tesla’s stock will face stronger headwind in a year or two, as traditional auto manufacturers are muscling in on the company’s market share with their electric-vehicle models scheduled to appear in showrooms in the near future.
I-PACE, the new electric SUV rolled out by U.K.-based luxury car maker Jaguar Cars, will enter American market in the second half of 2018, the company said in a release on March 1. The suggested retail price of I-PACE by Jaguar starts from $69,500 according to the company’s website, $10,000 cheaper than that of Model X, the Tesla equivalent.
German auto maker Audi AG (NSU) said its first all-electric SUV E-Tron will reach the European retailers by the end of 2018 in a release on March 6.
“I think it’s safe to say that with all these superior competitors in the market often at significantly lower prices, Tesla Model X sales will soon approach approximately ‘zero’ and Model S sales will continue to slide,” said Mark Spiegel, managing member at Stanphyl Capital, a hedge fund holding a short position in Tesla, in his letter to investors issued on March 29.
Spiegel said in an interview he expects the stock to plummet below $200 in the next two years.
Chunk Li, analyst at First Shanghai Investments Ltd., has a buy rating on Tesla’s stock and a 52-week price target of $395.
“The car they make are very popular among the owner,” Li said.
Li said his optimism is based on an owner satisfaction survey conducted by Consumer Reports published in December. The report ranks Tesla as the best automaker to satisfy customers after living with their cars for three years.
