Rating is due to concerns about the auto company’s niche market.
FORTUNE — Tesla Motors Inc. (TSLA), the new kid on the block in the auto world, may be a Wall Street darling, but Standard Poor’s Ratings Services signaled it isn’t impressed with the luxury electric-car maker, and sideswiped it with a junk rating.
The firm rates Tesla six levels into junk, at a B- corporate credit rating, citing concerns about the auto company’s niche market that has a very limited product range, and operating diversity compared to significantly larger and stronger rivals. SP warned it expects Tesla will face pressure from competitors aiming to penetrate the alternative-fuel vehicles markets with improved automobiles.
“We believe there is considerable uncertainty in Tesla’s long-term prospects and believe that the company is less likely (compared to larger, more established automakers) to successfully adapt to competitive and technological [risks],” wrote SP credit analyst Nishit Madlani in a research report.
Interestingly, SP’s new rating on Tesla is “unsolicited,” meaning the firm doesn’t have a rating agreement with Tesla. But SP said it believes there is “sufficient market interest in the company’s obligations to initiate analytical coverage.”
Tesla earlier in May reported record sales of the company’s Model S, exceeding Tesla’s own expectations. The automaker intends to expand Model S production later this year and also introduce Model X next year. Tesla also first began to sell cars in China earlier this year, a market the company said could be one of its largest within a few years.
The company’s shares, which closed above $211 on Tuesday, have soared since it went public at $17 in 2010. Investors are betting Tesla can continue to generate strong sales of the company’s pricy electric sedans and potentially a cheaper third-generation vehicle intended for the mass market.
But SP warned it could lower Tesla’s rating if it appears projected long-term demand fails to meet its estimates, leading to overcapacity. A downgrade could also occur if additional debt funding needs arise, or if cost overruns occur as Tesla aims to expand the Model S into Europe and Asia this year.