JEFFERIES: Tesla won't turn a profit until 2020 — initiate underperform with a 'heavy heart' (TSLA)

Elon Musk

Philippe Honchos, an analyst at Jefferies, joined the ranks of Tesla analysts Tuesday morning, though he seems to stand out from the crowd.

"It is with a bit of a heavy heart that we initiate coverage of Tesla at Underperform," he wrote in a note to clients (emphasis ours).

"Achievements to-date and vision are impressive, but we don't think Tesla's vertically integrated business model can be scaled up as profitably and quickly as consensus thinks and valuation multiples imply," Houchois wrote.

Tesla has already proved it has the best electric car on the market, Houchois says. He calls Tesla's competition in the electric vehicle market "distant." But, the company's biggest obstacle is not the auto industry but itself, and if it can't get out of its own way it's not worth its current price, Houchois said.

Growing revenue will be the easy part, but Tesla's 455,000 preorders for the Model 3 is equivalent to about 15% to 20% of the current sedan segment globally, Houchois said. That gives him "reservations" about the market's ability to absorb that many cars.

Tesla is expected to launch a new semi-truck soon as well, which could also increase its revenues.

Turning the revenues into profits is the hard part though, and Tesla's costs are high. The cost of producing batteries are expected to peak at about 24% of total revenue in 2018, before declining below 20% in 2020 as the company produces more cars and completes construction of its Gigafactory.

The cost of materials is rising and the prices for batteries are deflating. Battery technology is sluggish to develop, and Tesla doesn't have a clear advantage over the competition in terms of energy density. It does, however, have manufacturing experience that its competitors don't. Houchois said that manufacturing costs could be about 30% of battery costs meaning Tesla has a big advantage over companies just getting into the business.

Tesla has proven it can post a profit before, in the third quarter of 2016, but Houchois doesn't think it will happen again until 2020.

"It is fair to assume that management has been more focused on delivering attractive product and building the foundation for growth than on generating profits," he said. "On our estimates, Tesla will not be profitable until 2020 and its gross margin development raises doubts about the ability of Tesla to generate returns in excess of current returns in the global auto industry."

Houchois expects Tesla's earnings in 2019 to be about $5.00 lower than the average of other analysts. The consensus among Wall Street analysts is $2.40, while Houchois expects a loss of $3.26.

His 12-month price target is notably lower as well at $280. Wall Street's consensus price target is currently $333.78.

Houchois' bearish note comes the day after Tesla closed at an all-time high of $385. Tesla is trading at about $378.94 and has gained 76.31% this year.