Goldman Sachs cuts Tesla to hold, upgrades General Motors to buy as it sees rebound in auto industry

• Buy General Motors instead of Tesla, Goldman Sachs said in a note on Thursday that highlighted its expectations for a rebound in the auto industry.
• Goldman said it expects global auto sales for 2020 to decline by 14.5% year-over-year, an improvement from its previous estimate of a 17% drop, then climb by 8.5% in 2021.
• GM is poised to benefit from its solid position in the US pickup-truck market, Goldman said, while Tesla is overstretched given its recent run and has seen several mixed data points.
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With a rebound expected in the auto industry, buy shares of General Motors, not Tesla, Goldman Sachs said.

In a note published on Thursday, Goldman updated its estimates for global auto sales and upgraded General Motors to a buy rating with a $36 price target, representing a potential upside of nearly 30% from current levels.

Goldman also downgraded Tesla to hold with a $950 price target, representing a potential downside of 2% from current levels.

Goldman said it sees a recovery in the auto industry and now expects global auto sales to decline by 14.5% in 2020, an improvement from its previous estimate of a 17% drop. For 2021, Goldman expects global auto sales to increase by 8.5%, lower than its previous estimate of 13%.

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The firm highlighted several data points to support its rating changes.

For General Motors, strong housing starts should result in an increase in pickup-truck sales, which would benefit GM's already solid position in that market, Goldman said.

Goldman said GM's exposure to China is also beneficial, as China is showing some signs of a quick rebound in economic activity following the coronavirus pandemic.

Goldman noted that GM has made significant investments in electric and autonomous vehicles; the company has announced plans to invest $20 billion in these technologies through 2025.

From a valuation perspective, GM looks attractive to Goldman. "GM is trading at 5.9X our estimate for normalized EPS, which is near the mid-point of the historical range," the bank said. "In addition, GM stock is below its historical $30 - $40 trading range."

For Tesla, Goldman underscored a mixed data set pointing to potential short-term challenges for the electric-car manufacturer and a high valuation.

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First, Tesla recently cut pricing by 5% to 6% for the Model 3, Model S, and Model X, which caught Goldman by surprise. And Tesla app downloads are tracking down about 30% quarter-over-quarter, which could correlate with lower sales in the quarter, the bank said.

Tesla's rich valuation drove Goldman to the sidelines.

"While Tesla has long been an expensive stock ... we believe that there is a higher bar for Tesla's fundamentals than for other stocks in our coverage given Tesla's premium absolute multiple along with its historically high volatility," Goldman said.

Tesla broke through the $1,000 price level for the first time earlier this week.

Still, Goldman has a long-term positive view of the company.

"We think that Tesla will be able to sustain a leading position in EVs (and with solid margins)," the bank said. "We also believe that Tesla's use of similar parts, leading ADAS/AV technology, and connected fleet bode well for both Tesla's margins and competitive positioning."

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