In an almost unheard-of action for a Wall Street investment banking firm, UBS downgraded Tesla Motors Inc. (TSLA-$267.39) to a “sell”, driving the price of the shares down 5.5 percent, or -15.49.
Such action in favor of the customer’s interest is admirable, but it seldom happens because the downgraded company and its officers will usually retaliate by blackballing the investment banking firm and its analyst from ever doing business with them again.
UBS’s Colin Langan, CFA said this afternoon that Wall Street’s consensus that Tesla will be building and selling over 1.5 million vehicles per year, and 17 gigawatts of standby energy storage by 2025, are unrealistic. Langdan stated, “We are downgrading TSLA to Sell as we expect both storage & auto volume growth to disappoint.”
According to Thomson/First Call data services, which tracks broker recommendations, there has never been a sell-rating issued on Tesla. Trading commissions for brokerage firms have been cut substantially over the last two decades, but the real big money is in investment banking fees for selling new shares and doing mergers and acquisitions.
One of the unwritten rules of investment banking is never to say anything negative that will make an enemy of a corporate prospect. Issuing “sell” recommendations is the ultimate way to destroy any future investment banking relationship with any company.
To understand what UBS put at risk by issuing a sell recommendation, it is important to know that global investment banking service fees from mergers and acquisition (M&A) advisory and capital markets underwriting totaled $90.1 billion during 2014–up 7 percent over 2013.
Langdan is concerned that the typical rosy scenario on Wall Street now expects Tesla to be building and selling about 50 times more cars per year in 2025 than the 33,000 they produced and shipped to paying customers last year. That would also imply that Tesla’s worldwide share of the luxury market would rise from about 0.6 percent this year to 8.5% by 2025.
Compared to competitors’ 2014 sales, by 2015 Tesla would be selling about 7 times more than the 225,000 Porsches sold in 2014; that it would be 2.5 times larger than Lexus; and that it would be “just slightly smaller than BMW & Audi today (1.9 & 1.8m respectively)”.
Langdan does not believe: “These automakers will not cede share easily. BMW already sells the i8 and i3 with an i5 and i7 expected. Audi is reportedly planning a plug-in version of the Q7 and A8, a Q6 e-tron battery-electric, and plug-in hybrid CUV in the future. Mercedes is reportedly working on a family of electric vehicles, two sedans and two CUVs, and Porsche is also weighing new plug-in or all-electric models.”
Langdan sees the Tesla stock’s 40 percent gain since March as anticipation that Tesla car batteries can be used for electric grid storage. Wall Street expects demand for the company’s “Powerwall/Powerpack” energy storage to emerge from ground zero to the stunning 2025 annual power demand of 17 gigawatts, but Langdan believes this enthusiasm is unjustified. He expects that Tesla will be building more battery manufacturing capacity at its coming Giga-factory outside Reno than the electric storage market can absorb.
Even if these sales numbers are remotely possible, Langdan questions Wall Street analysts’ “happy talk” that Tesla’s auto company can produce a 14 percent operating margin in an industry that normally has a margin of around 7 percent, or that Tesla’s energy storage division will be at a 15 percent operating margin.
Langdan reminds customers that the company “would require adding two more assembly plants and probably two more giga-factories; the total costs would likely be $6-9” billion. Those massive capital expenditure and interest costs would substantially hit Tesla’s reported earnings.
After issuing a “sell” recommendation on Tesla, UBS must expect it will never see another dime in investment banking fees from Tesla, Solar City, SpaceX and any of the numerous other entrepreneurial start-ups from Elon Musk in the future.
That willingness to do the right thing explains why the market hammered Tesla stock so hard Tuesday.