Another Wall Street bank has joined the list of research shops predicting a drop in Tesla (TSLA) stock.
HSBC analyst Michael Tyndall initiated coverage of Tesla with a Reduce (or Sell) rating and $146 price target, suggesting a 33% decrease in Tesla’s stock price. Following the announcement, Tesla shares dropped 3% in early trade and are down 17% in the past month.
Tyndall commended Tesla as an innovator in the space, emphasizing its freedom from legacy costs that hinder expansion in the EV sector. However, Tyndall’s model for future cash flows is heavily based on initiatives that likely won’t generate profits until the end of the decade.
“We see considerable potential in Tesla’s prospects and ideas, but we think the timeline is likely to be longer than the market and valuation is reflecting. Hence the Reduce rating,” Tyndall wrote.
HSBC views Tesla differently than “conventional carmakers,” citing its cost leadership in the EV space and its potential to remain a leader in the industry. While Tyndall admits that Tesla’s growth aspirations of producing 20 million units by 2030 are ambitious, he acknowledges that questioning Tesla’s credibility is “problematic” given its track record of eventually delivering on promises. However, Tyndall believes that the 20-million-unit goal looks “too optimistic” at this point.
According to Tyndall, the main challenges to Tesla’s growth include upcoming non-car products such as fully autonomous software, Dojo supercomputer products and services, and robotics. Because of their nascent nature and uncertain regulatory environment, Tyndall’s model does not project cash flow streams from these products until 2028 at the earliest.
“Our DCF [discounted cash flow] valuation is generous as we assume businesses such as FSD [full-self driving], Dojo and Optimus all become successful by the end of the decade, contributing around 40% of our DCF value. We think, however, that the expected cost of capital for these businesses should be well above the group average given the regulatory and technological challenges they face,” Tyndall wrote.
Indeed, the industry is currently facing several uncertainties related to autonomous software. Tesla is under a NHTSA and Department of Justice investigation into its practices, while its rival, GM, has faced setbacks with its Cruise autonomous service. GM has even had to recall its Cruise vehicles for safety updates.
Elon Musk, CEO of SpaceX and Tesla and owner of Twitter, is considered a “risk” for Tesla by Tyndall, not because of his controversial comments, but because of his global fame. Tyndall believes Musk’s prominence presents a considerable ‘single man’ risk at the company.
Tesla has sought to position itself as a company beyond just Elon Musk, but Tyndall believes Musk still represents a significant risk to the company.
In addition to his concerns about Musk, Tyndall and the HSBC team have also developed a bull-case scenario for Tesla with a $280 price target. Tyndall highlighted potential upside risks such as faster-than-expected EV transition globally, continued market-share growth for Tesla, and a favorable regulatory environment for products like FSD.
Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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