Tesla Profits Will Be Stymied By German Competition.
“The window for exceptional profit by Tesla is relatively small and in our view will close by 2019-2020”
Tesla Motors has only a limited window of opportunity to make profits because the Germans will soon be parading an impressive array of competing electric cars, according to Berenberg Bank of Hamburg, Germany.
That wasn’t the only bit of recent bad news for Tesla.
Tesla Motors CEO Elon Musk’s announcement that he would make an all-stock offer for solar panel installation firm SolarCity worth nearly $3 billion led to harsh criticism with financial commentators describing it as “harebrained” and “stretching industrial logic” in contrast to Musk’s view that it was a “no brainer”. Some think the deal will be vetoed by institutional shareholders who hold a majority of shares.
And news broke that a Tesla became the first car that was driving itself to be involved in a fatal accident.
The report from Berenberg Bank analyst Adam Hull said Tesla’s opportunity to make long-term profits will be constricted by the competition, mainly from Audi, BMW Mercedes and Porsche, which are designing very competitive products.
“The window for exceptional profit by Tesla is relatively small and in our view will close by 2019-2020, as the concerted reaction by the German premium brands will start, we think, in late 2018 with the Audi SUV and then accelerate. The more success that Tesla has, the greater the temptation for the German (manufacturers) to pull forward their plans and take a short-term (profit) hit,” Hull said.
At the Frankfurt Car Show last fall, Audi showed a concept version of the E-tron Quattro, with a potential range of 310 miles, a direct competitor with the Tesla Model X SUV.
Forecasts too high
Berenberg also cut its Tesla profit forecasts for 2017 to 2020 by three to six per cent because of lower estimated Model S and Model X sales and margins. Berenberg also said the consensus of analysts EBIT (earnings before interest and tax) profit forecasts published by Bloomberg of 10%, is too high. It assumes a foru per cent margin for Tesla in 2019-2020.
“The richest seam of profits, i.e. large cars like Model S and large SUVs like the Model X, will have been largely mined by Tesla for minimal profit by end-2018. The electric Audi SUV is due in the 4th quarter 2018 with more premium electric cars/SUVs soon after,” Hull said.
The Model 3 small electric car when it arrives in 2018 will boost Tesla volume, but it won’t do anything for the bottom line, with Berenberg predicting EBIT losses for it between 2018 and 2020.
The Wall Street Journal’s Heard on the Street columnist Charley Grant pointed to increased competition, with GM’s Chevrolet Bolt, an electric car with 200 miles of range reaching the market later this year, while Volkswagen said it plans to develop about 30 different electric models over the next 10 years.
Grant said this wouldn’t be a problem for investors if Tesla’s stock price wasn’t valued as though all its targets had been achieved.
“The shares trade at more than 120 times forward adjusted earnings, according to FactSet. Incessant cash burn and looming competition is hardly a trillion-dollar formula,” Grant said.
Be wary
Berenberg’s Hull said potential investors in Tesla should be wary.
“The question for investors is whether this is a good time and price to invest into the business – we think not. Tesla has done an impressive job in designing, developing and producing the Model S and achieving what appears to a large – but we think largely temporary – cost advantage over competitors in its battery production,” Hull said.
“A great start but sleepy giants are waking up. We think Tesla has achieved a huge amount and with a strong brand, it is well placed for the long term, but given the strong U.S. dollar and the expected increase in electric and plug-in hybrid competition from premium brands and the mass market brands, many of which may be prepared to accept large losses on EVs and PHEVs, we think the (share) price assumes too much,” Hull said.
After Tesla unveiled its new small Model 3 earlier this year and raised its production targets, investors have been becoming more wary.
Morgan Stanley responded to Tesla’s decision to pull forward its 500,000 car production forecast for 2020 by 2 years, by reiterating its forecast for 2018 of 108,000 vehicles. At the time it commented that Musk’s new sales target calling for 1 million vehicles in 2020, was four times higher than its forecast of 248,000.
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