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Jefferies Downgrades Tesla, is it Time to Sell?

Tesla (TSLA) is the most dominant and popular EV maker and has surged dramatically this year due to the EV revolution. However, the stock recently witnessed a slump after Jefferies downgraded it, questioning the company’s EV dominance. TSLA has already recovered some of the lost ground. Read on to find out if TSLA can continue its rebound and generate even greater momentum.

The world is gradually shifting from gasoline powered cars to electric vehicles (EVs) due to cost-efficiency, improved battery life and enhanced performance, and fear of global warming. Tesla, Inc. (TSLA) is the clear leader in the space. The company designs, develops, manufactures, and sells EVs, EV powertrain components, and stationary energy storage systems in the United States, China, and internationally. TSLA operates primarily in the following segments: Automotive, Energy Generation, and Storage.

TSLA is currently dominating the booming EV market, the so-called the new world of “computers on wheels.” However, the company was recently downgraded by investment banking group Jefferies, which cited "execution risk" it believes the automaker could face in 2021 amid product launches and an expansion push. The firm downgraded TSLA last Thursday from “Buy” to “Hold.”

TSLA is riding secular tailwinds with record revenue and income growth. In the third quarter, the company generated $8.7 billion in revenue, growing 39% year-over-year, driven by a 44% year-over-year rise in vehicle deliveries. Its energy generation and storage business generated $579 million in revenue, rising 44% year-over-year as the business reached record deployments of 759 MWh. Non-GAAP EPS came in at $0.76, more than doubling year-over-year.

With strong global EV demand and favorable macro trends, the stock has soared an enviable 629% year-to-date. Hence, despite the recent downgrade, impressive financials, and developments within the company along with a few other factors have helped it earn a “Strong Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates TSLA:

Trade Grade: A

TSLA is currently trading higher than its 50-day and 200-day moving averages of $474.84 and $297.72, respectively, indicating that the stock is in an uptrend. In fact, the stock’s 49.3% return over the past month reflects an intriguing short-term momentum.

TSLA reportedly delivered a record 139,300 vehicles during its third quarter, rising nearly 54% compared to the preceding quarter. The company’s product mix is witnessing a massive shift from Model S and Model X to the more affordable Model 3 and Model Y. Consequently, Model S/X deliveries fell 13% year-over-year, compared to the 56% rise in Model 3/Y deliveries during the quarter.

The long-awaited addition of TSLA shares to the S&P 500 will happen next week.

Buy & Hold Grade: A

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, TSLA is well positioned. The stock is currently trading just 6.8% below its 52-week high of $654.32.

The stock has grown more than 673% in the past three years due to its aggressive research and development expenditure, additional machinery installation to upgrade production capacity, and an increase in the proportion of renewable energy usage at its factories. The company’s top-line has grown at a CAGR of 38% during the same period.

CEO Elon Musk believes TSLA needs to increase its production because capacity to meet current demand for its products.  Consequently, TSLA has decided to further dilute its shares with an approximate $5 billion in share offering, its second in three months. The plan comes at an important time for TSLA, as moves to build new factories in Germany and Texas as part of its global expansion. Also, SLA unveiled battery construction innovations, factory details, and future cheaper models at its Battery Day event in September.

Peer Grade: A

TSLA is currently rated #1 of 34 stocks in the Auto & Vehicle Manufacturers industry. Other popular stocks in the group are Toyota Motor Corporation (TM), Ford Motor Company (F) and Workhorse Group, Inc. (WKHS). While F has lost 1.4% so far this year, TM and WKHS have returned 10.6% and 616.5%, respectively, over the same period.

Industry Rank: A

In the Auto & Vehicle Manufacturers industry is ranked #3 of the 123 industries. The companies in this industry manufacture and sell vehicles including passenger cars, light trucks, motorcycles, and more. Underutilization of production plants due to lockdowns and lower auto loan generations have severely impacted the industry. However, there has been growing excitement among investors regarding the automotive industry trend in going electric.

Overall POWR Rating: A (Strong Buy)

Overall, TSLA is rated a “Strong Buy” due to its impressive past performance, short-and-long-term developments, promising product line and solid price momentum, as determined by the four components of our overall POWR Rating.

Bottom Line

TSLA stock has soared this year and is dominating the headlines because of in leadership position in EVs. In addition to TSLA is implementing more ambitious architectural changes to its products and factories to improve manufacturing cost and efficiency. The company is also innovating fast in areas such as Autopilot (self-driving technology) and e-bikes.

The Jefferies downgrade report reads: “We see 2021 as a year when Tesla’s growth and earnings will accelerate with the roll out of two vehicles with high commonality but also an acceleration of investment in both capacity and batteries that add some degree of execution risk.” On the other hand, prominent VC investor, Gene Munster, thinks TSLA could soar over 300% to reach $2,500 in the next three years.

Overall, the Street believes that TSLA’s long-term prospects are still strong. Analysts expect TSLA’s current year and next year revenues to grow 25.6% and 46.2%, respectively. Moreover, the company’s EPS is expected to grow at a rate of 354% per annum over the next five years. TSLA is certainly well-positioned to grow based on its continued business growth, favorable earnings, production capacity and revenue outlook. But there is the possibility short-term price corrections driven by profit-taking activity.

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TSLA shares were trading at $638.59 per share on Monday afternoon, up $28.60 (+4.69%). Year-to-date, TSLA has gained 663.26%, versus a 15.53% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.


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