Tesla Inc. will face the first true test of its position in the electric vehicle market in 2019, as competition from legacy car makers, including Jaguar, Porsche, BMW and Mercedes, heats up.
That’s the view of Oppenheimer analysts in a note published ahead of two Tesla bull/bear lunches that they plan to host in New York this week.
“We continue to believe that sustainable disruption in the transportation market both from the fuel and autonomy perspectives is what is at stake for Tesla shares,” the analysts, led by Colin Rusch, wrote in the note. “In other words, is Tesla going to be the dominant force in the transport market or one of many actors?”
Oppenheimer clients are deeply divided on Tesla TSLA, +2.74% with bulls and bears focused most acutely on whether the company can execute its technology-driven innovation strategy in a “capital intensive, durable goods, safety-constrained end-market,” said the note.
The bulls argue that Tesla’s recent progress in meeting production goals—it’s aiming to produce 5,000 Model 3 vehicles a week by the end of June—is a key benchmark in evaluating its ability to disrupt the market. The bear case is that production inefficiencies are hampering its ability to generate sufficient and sustainable cash flow.
“We believe Tesla, as a manufacturer, must show meaningful progress toward margin targets to justify increased capital investments,” said Rusch.
Bulls believe Tesla will enjoy strong demand for its cars given a loyal customer base and market share gains for Model S and Model X vehicles and a solid backlog of orders for the Model 3. Bears note the growing competition from traditional car makers.
Bulls point to a still open playing field for self-driving technology that Tesla may dominate given its large fleet of cars that are collecting data on the road. Bears say the company is lagging rivals General Motors Co. GM, -0.73% and Alphabet Inc.’s Waymo GOOG, +0.15% GOOGL, +0.46% and faces risk in some of its hardware choices and user error, as well as delays in feature rollouts.
And while Chief Executive Elon Musk insists the company will not need to tap the capital markets this year, both bulls and bears expect it to do so.
“We believe its solar assets could be refinanced to generate $500 million to $800 million in cash, and expanded working capital lines could offset cash needs,” said Rusch.
Oppenheimer believes that bulls are hoping Tesla will seek partners to help with funding and expand in new regions, while bears are focused on the pressure it’s putting on its suppliers and existing partners to meet tough deadlines.
“We believe Tesla is actively managing these relationships to support medium/long-term growth,” said Rusch.
Oppenheimer has a perform rating on the stock, which it says is closest to a hold rating under Finra rules.
Tesla shares were up 1.1% Wednesday, and have gained 14.5% in 2018, while the S&P 500 has gained 3.6% and the Dow Jones Industrial Average has lost 0.2%.
