Tesla stock is a sell: Why this analyst downgraded Elon Musk’s EV giant

CFRA Downgrade to Sell [0:02]

• CFRA has downgraded the stock from hold to sell.
• The primary reason for the downgrade is that the stock's valuation has become detached from fundamentals.
• The analyst notes a growing disconnect between the stock's performance since its April bottom and current street estimates for the next several quarters.

The analyst believes that current estimates are too high and do not fully incorporate the negative impacts of a new law that went into effect in early July. This law is expected to significantly affect the company's bottom line, particularly concerning emissions trading credits.

"The analyst saying that the stock's valuation has become detached from fundamentals."

Impact of Emissions Trading Credits [0:53]

• The new law signed into law in early July is expected to have a significant impact on the company's bottom line.
• Specifically, the law will cause emissions trading credits to go away, which have been a huge earnings growth driver in recent years.
• Last year, these credits accounted for about $2.8 billion of revenue, a 54% year-over-year increase.
• There is essentially no cost associated with this revenue, meaning it all flowed down to the bottom line.
• Estimates for the third quarter and looking out through the end of next year are considered too high and subject to downward revision.

The disappearance of emissions trading credits is a critical factor, as this revenue stream has been a substantial contributor to the company's profitability, with virtually no associated costs.

"specifically the impact on Tesla's bottom line uh from the emissions trading credits uh going away which has been a huge earnings growth driver for Tesla in recent years it was about 2.8 8 billion of revenue."

Valuation and Earnings Estimates [1:46]

• Estimates are considered too high and not fully reflected in consensus.
• The stock's valuation appears very frothy, trading at over 200 times next year's earnings estimate.
• Historically, the stock has experienced several pullbacks of over 40% from peak to trough.
• The current setup is seen as another instance where such a pullback could occur.

The combination of inflated earnings estimates and an extremely high valuation multiple suggests that the stock is vulnerable to a significant correction.

"I mean it's trading at over 200 times our earnings estimate for next year."

Long-Term Constructiveness vs. Near-Term Concerns [2:35]

• The analyst remains constructive on the company's story longer term.
• The current downgrade is a 12-month call, with a 12-month price target of $300.
• Red flags suggest a pullback is imminent in the near term.
• Longer-term, the company is well-positioned in future industries like autonomous driving and robotics.
• However, near-term earnings estimates have been overestimated, and the adverse impact of the new law is not fully understood.

Despite strong long-term potential, the analyst emphasizes that immediate concerns, particularly the financial impact of regulatory changes, warrant caution and a lower near-term price target.

"it's just that the near-term I think you know analysts have really overestimated the earnings and there's a lack of understanding just how much of an adverse impact that that law is going to have on Tesla's bottom line starting with the third quarter"

Autonomous Driving and AI Assessment [3:21]

• While there are reasons for optimism regarding autonomous driving and AI, the full self-driving (FSD) software is not considered ready for prime time.
• Current deployments of FSD are limited to Austin and the Bay Area.
• Online videos have shown instances of the software taking vehicles the wrong way into oncoming traffic, indicating safety concerns.
• The company is expected to be cautious about rolling out the technology to other markets until it is proven safe and ready for mass adoption.
• Elon Musk acknowledged the possibility of a rough few quarters ahead for the company.

The speaker expresses skepticism about the current state of the FSD technology, highlighting safety issues and limited deployment, suggesting that its much-touted potential may be further out than some believe.

"full their full self-driving where it is today is not ready for prime time."

Executive Pay Package and Shareholder Alignment [4:47]

• The proposed executive pay package is expected to be approved by shareholders in November.
• Shareholders have consistently shown support for the executive, who has delivered strong returns over time.
• The pay package is seen as aligning the executive's interests with those of the shareholders.
• The executive will not meet the first payout threshold under the new package until the stock essentially doubles in price.
• The goals for this pay package are lofty, similar to those in 2018, where all thresholds were met.

The analyst believes the executive's compensation plan is structured to incentivize performance that directly benefits shareholders, with significant stock price appreciation required for payouts.

"we also like the fact that it really aligns Musk's interests with the interests of shareholders."