By Tomi Kilgore
Daiwa’s Jairam Nathan is worried about how governance concerns will aggravate difficult financial conditions
Shares of Tesla Inc. were downgraded Tuesday by a longtime bull, who expressed concerns about increased focus on governance issues surrounding the electric-vehicle giant’s Chief Executive Elon Musk that could make a “tough” EV-demand environment even worse.
The stock (TSLA) bounced 1.3% in morning trading, after closing the previous session at a nine-month low.
Daiwa Capital Markets analyst Jairam Nathan cut his rating to neutral, after being at outperform for the past two years. He lowered his price target on the stock by 20%, to $195 from $245.
His concern is that corporate governance concerns have come back to the forefront when a court ruling voided CEO Musk’s $56 billion compensation package, due to the “non-independence” of Tesla’s board of directors.
And a recent report in The Wall Street Journal that highlighted the governance issues have raised uncertainties around potential changes to Tesla’s board and leadership.
Nathan said that while he sees a path for long-term investors to be rewarded by a rebound in EV demand and growth, the recent knocks on Tesla’s governance could make that path more volatile.
“Any restrictions on Tesla’s propensity to invest for the very long-term, pursuit of breaking technology/manufacturing barriers and attracting top talent could negatively impact our long-term thesis,” Nathan wrote in a note to clients. “These risks along with a tough demand setting is likely to remove any support for the stock price.”
Tesla’s stock has tumbled 26.2% year to date, enough to make it the S&P 500 index’s worst performer this year. The selloff has been highlighted by a 12% plunge on Jan. 25 after the company reported “massively” disappointing fourth-quarter results, as price cuts amid slowing demand led to a downbeat growth outlook.
Read: Tesla’s stock dive means the EV maker is now worth less than Broadcom.
Nathan said the company has shown investors what its “very long-term focus” during the near-term EV demand lull is, with its investments in full self-driving, next-generation and lower-priced EVs and robotics.
“Any restrictions to these abilities” resulting from the governance issues “could limit the technology and cost advantage enjoyed by Tesla,” Nathan wrote.
Tesla’s stock has dropped 16.4% over the past three months, while the Global X Autonomous & Electric Vehicles ETF DRIV has gained 4.2% and the S&P 500 index SPX has rallied 13.2%.