What Does This Tesla Motors Downgrade Really Mean?

By Trey Thoelcke Published Jul 8, 9:50AM EDT

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With Deutsche Bank downgrading Tesla Motors Inc. (NASDAQ: TSLA) to Hold from Buy on Tuesday, one has to wonder why big banks issue public ratings at all, or what they even mean. It is always a guessing game when it comes to the short-term moves of stocks that have negative net earnings and no dividends. And with a price target raise to $280 from the current $260 a share, we are certainly talking about a short-term move here being forecast by the German banking giant.

The electric vehicle (EV) industry draws its valuations mainly from sentiment, after being backed up by the main fundamentals of sales and relative financial health. The fundamentals can provide a floor, but nobody really knows where that floor is, because the entire EV industry is so new and unproven.

Tesla’s fundamentals in those terms are quite sound. In terms of sales, it delivered a total of 11,507 vehicles last quarter after delivering 10,030 in the first quarter. After selling 33,000 in all of 2014, the company is on track to beat that handily. If we want to consider potential catalysts, there is the fact that Tesla is growing its car sales in the face of state after state forbidding it to sell directly to consumers. If that regulation ever breaks on a federal level, which is possible considering the political capital inherent in being an electric car advocate, then Tesla sales could explode higher.

That is a purely political issue though, and a gamble if you’re betting on it.

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Financially speaking, Tesla is in tip-top shape for an EV company, with $1.53 billion in cash on its balance sheet and debt that is less than 9% of market cap. Granted, it is much easier to raise equity and keep debt low when everyone is crazy about your stock and wants to give you money. But even further than that, the $2.96 billion in aggregate principle debt that Tesla carries is entirely 100% fixed rate debt. It is essentially riskless.

The only exposure to interest rates that Tesla carries is a tiny $77.7 million warehouse facility loan at floating rates. That is nothing. Interest rates could go through the roof and it wouldn’t add to debt service costs at all. Stable financial footing and conservative accounting is critical in the EV industry as companies have gone bankrupt left and right. Better Place went bankrupt in May 2013, ECOtality in September, Fisker Automotive in November, with many other smaller names lining the streets. (Car Charging Group is still standing though, waiting for Tesla to succeed so it can start charging the Model S.) Tesla is in no danger of bankruptcy, or anything close to it.

So the fundamentals are sound for Tesla. The only question is where the floor is, and how high above it are we? That, nobody really knows. Put another way though, Deutsche Bank is advising caution with a stock that is very near its all-time high. Nevermind Tesla, this certainly seems like prudent advice in general, given the amount of volatility in global markets of late, and the very real possibility that it will get much worse next week for reasons anyone who follows international developments is quite aware of.

Coupled with that is the ominous decline in the aggregate money supply circulating in the U.S. banking system. Judging by the latest release (table 2, final column) it looks like we have about four weeks until growth not only stops but turns negative. The last time that happened was September 2008.

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So Deutsche Bank’s downgrade of Tesla really has little to do with Tesla itself. It is more likely just a reflection about the market in general, which should be taken to heart. Tesla is a Hold for now, but in three to four weeks, if money supply growth does not recover, it is a Sell. Not because anything is wrong with the company fundamentally, but because stock market fuel is running dangerously low.

About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.