Tesla Price Target, Rating Slashed By BofA On Back Of Serious Headwinds

Tesla to have its gearboxes and electric motors manufactured at the Gigafactory in Nevada.

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Renewable energy products and electric vehicle manufacturer Tesla Inc (NASDAQ:TSLA) is feeling the heat from the coronavirus outbreak. The deadly pneumatic disease has paralyzed Western economies with populations in countries all over the globe being forced to retreat indoors. The resulting fall in productivity and output has cut purchasing powers, and uncertainty in global oil markets has ensured that stock indexes find it difficult to recover despite billions of dollars in government stimulus.

The Bank of America, it seems, is fully cognizant of all these realities, and the effects they might have on Tesla. In a fresh analyst note released today, BofA analyst John Murphy has dropped Tesla's rating down to Underperform, due to the significant headwinds that the company is expected to face this year due to the aforementioned coronavirus shock.

Tesla Downgraded By Bank of America Due To Upcoming Headwinds Fuelled By Coronavirus

In the investor note, Murphy cites several reasons for being cautious about Tesla's future. The analyst cites several reasons behind this outlook, ranging from production problems to increased competition in the electric vehicle market in the future. He believes that not only does Tesla stand to witness decreased production in the future, but that the company's existing portfolio of vehicles might not provide it with the best of opportunities in delivering its operational and technological strengths in the market.

In other words, Murphy believes that Tesla's existing vehicle models might have run its course in the market and that the company needs to introduce new products in the market to stimulate consumer interest. Naturally, this latter bit is our take on the matter, but multiple sources quote the analyst's concern about a "spike/burnout" in Tesla's models.

Additionally, BofA is not too optimistic about Tesla's vehicle deliveries in the near future. Multiple analysts have expressed their doubts about the company's ability to meet its self-set target of 500,000 vehicle deliveries by the end of this year, and BofA is concerned about the cash burn that Tesla will have to face if it's to keep facilities running in a time when purchasing powers in the company's key markets have been depressed by the coronavirus.

The Tesla Model Y is thought to be the 'next step' in the company's vehicle portfolio. Image: WSupercars

Analyst also cuts Tesla's price target by $15 to bring it down to $485, citing three scenarios for the company's future

Apart from providing some tough concerns for Tesla's near-term future, The Bank of America has also cut the company's price target by $15 to bring it down to $485. This estimate is for 2021-2022, with the bank also outlining three scenarios for Tesla's performance during this time period.

Murphy's three scenarios cover a base, bearish and bullish cases. In the three cases, Tesla Inc is stated to have Enterprise Value/Sales and Enterprise Value/EBITDA ratios of:

Base Bear Bull
EV/Sales: 2.5 4.5 0.3
EV/EBITDA: 9 17 3

Readers are advised to keep in mind that lower values of both these multiples are preferred by investors due to the fact that they demonstrate a company's ability to generate sufficient operating profit or revenue to cover its enterprise value. A company's enterprise value is defined as the sum of its value after taking into account claims of all creditors and shareholders.

Murphy also states that BofA's price target is based on probability-weighted scenario analysis, and based on historical values fuelled by Tesla's strong progress, the bank believes that the probabilities of the base, bear and bull cases materializing are 60%, 10% and 30% respectively.

As economies in North America and Europe come to a standstill, many have turned to China as Tesla's potential savior in these troubling times. The East Asian country has a large automobile market that might take care of all of Tesla's delivery problems if the company is able to ramp production. For his part, Murphy believes that global auto-shipments will drop, with a slow U-shaped recovery.

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