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Tesla: Buy Rating; $400+ Price Target

By Investing.com Stock MarketsApr 04, 2017 01:01AM ET
www.investing.com/analysis/tesla:-buy-rating;-$400-price-target-200181113
Tesla: Buy Rating; $400+ Price Target
By Investing.com   |  Apr 04, 2017 01:01AM ET
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by Chaim Siegel of Elazar Advisors, LLC

Tesla (NASDAQ:TSLA) is going to be a momentum story this year, one that's probably going to run over the shorts. Production and deliveries will meaningfully accelerate in the fourth quarter. Even though we expect earnings misses versus Street numbers, we don’t think it matters. It hasn’t mattered till now.

What matters is the Model 3 launch, volume and scale. That will give credibility to the valuation as we look out to 2018.

Tesla Weekly 2014-2017
Tesla Weekly 2014-2017

Short Interest Will Drive Stock Upside

Some investors hate Tesla with a passion and some love Tesla with equal passion. With about 25% of the stock's float short, we think the “haters” are about to get run over. If the company hits their plans through this year, deliveries are going to jump in the fourth quarter.

That can act as proof-of-concept for the Tesla story, driving production volumes and operating leverage. And that will drive optimism for 2018.

We think the shorts are playing with fire ahead of this. They may not have much confidence in management, but if the company is close to targets, look out shorts.

Company’s 2018 Targets Not Far-Fetched

The Model 3 begins to ship in Q3 with volume production in Q4. There are estimates of at least 400,000 Model 3’s on order. The company is expecting production capacity of 500,000 units in 2018. If the order numbers are right, the company’s estimates for 2018, while huge, are not so crazy. Huge is bullish.

Q4 Jump

Again, we speak to the shorts. Q4 is this year. There is likely going to be a huge jump in revenues and profits in Q4 with the Model 3 launch. How can you be short for that?

The company gave their launch schedule for the Model 3 during their last earnings conference call in February. They expected production of 5,000 Model 3’s by year-end 2017. To us that sounds conservative and it could be better than that.

If you heard what they said about their supply ramp schedule it’s faster than “5,000 by year-end.”

They told suppliers they need the ramp to be 1000 in July, 2000 in August and 4000 in September. That ramp means that October should be, our guess, higher than September. That jump in October could be more than the jump from August to September. That means already by October you are at their “5,000 by year end.”

We’re assuming a big sequential jump (quarter to quarter) in Q4. That’s based on simply adding the Model 3 to the Model S and X.

That jump in revenues should drive margin leverage as they hit production scale. This scale can prove much more efficient than the S or X because the same volume is coming from one model this time as opposed to two models previously. The extra volume should help overall production efficiency for the S and X as well.

Modeling Earnings

Everybody can make their own assumptions. There is no way to know what is actually going to happen. We can only estimate and we give you our estimates.

We want to try to forecast how the market will value Tesla: what earnings will the market hope for as the company starts to hit their targets.

Tesla met their sales projection for 25,000 units this quarter. That puts them inline to hit their first half guidance for deliveries. Based on that current trend of hitting targets, we think the company has the ability to hit some of their other forecasts, namely for the Model 3.

The demand is there, the production experience is there and this ramp should be much bigger.

To have an opinion on Tesla stock we feel you have to work through the numbers to see if they make sense.

Here’s our take. You can play with the numbers based on your own take.

Tesla Auto Revenue
Tesla Auto Revenue

We take the planned production of Model 3 and haircut it for deliveries that slip. We then add on the S and X sales to get to our Auto Revenue numbers. Model 3 is going to be selling for a lower price so we account for that as well.

This is the most important part of the story this year and the jump in revenues is meaningful.

If you add up the deliveries in 2018 in our model you get to 350,000 units delivered. The company said they can hit 500,000 in production in 2018. CEO Elon Musk said that’s the “most likely outcome.”

So if anything, we’re conservative, which is pretty nuts.

Our Earnings Are Below The Street This Year But, Really Who Cares…

If Volumes Hit This Year, 2018 Is All That Matters

Our 2017 numbers are below The Street. But really, who cares. If either of us are correct on Q4, you have to start thinking why wouldn’t Q1, Q2 and Q3 earnings of 2018 be higher than Q4 2017? If that happens, this turns into a huge story. (See our model, below)

We’ve seen that the stock does not solely move on earnings. We think the stock moves on the visibility of the outlook. We expect that visibility to build as Model 3 is produced and sells because the ramp for 3 is much greater than for Tesla's other models.

When we work through the numbers (detailed in the model below) our 2018 EPS—which we think is what matters—can get to over $11.00.

Can that actually happen? Who knows. But we think that’s what The Street will start thinking about if Tesla starts to hit their targets this year.

That is of course assuming everything goes right, which we think the stock will reflect this year if Model 3 sales hit or beat targets. Remember, the stock will also reflect optimism because fundamental momentum will force shorts to cover. That 25% short interest will have to step aside, helping the stock launch.

We think exponential earnings growth can easily afford a 30-40 multiple so we can easily see the stock reaching $400-plus.

Will our earnings numbers prove correct? We can’t know, nor do we think it matters this year. All that matters now is the topline momentum. If Model 3 estimates materialize to actual results, the stock can easily reflect $11 earnings “hopes” for next year.

Solar / Energy

We actually love solar (SolarCity is a Tesla subsidiary) and the overall energy potential, although this too is still a show-me. They had huge organic growth, but we think this is still a nascent industry with immense potential.

Buying Tesla, we think, is getting this piece of the business for free because we’ve almost solely been focused on Auto revenues and earnings.

Services

Auto services currently show no profit at Tesla. But services at traditional companies have among the highest margins. This segment also has huge potential.

Conclusion

What’s fun about following this company now is that anything can happen. The potential is huge. The hopes are huge. As Model 3 ramps and jumps the sales numbers, those hopes can start to factor into earnings hopes for next year. That, combined with 25% of the float short, could mean this stock is about to catapult.

Model

Tesla Revenue and Growth Model
Tesla Revenue and Growth Model

Disclosure: Portions of this article may have been issued in advance to subscribers or clients. All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC and their related parties harmless. Any trading strategy can lose money and any investor should understand the risks.

Tesla: Buy Rating; $400+ Price Target
 

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Tesla: Buy Rating; $400+ Price Target

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Comments (6)
Manuel Martin
Manuel Martin Apr 04, 2017 4:56PM ET
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TESLA at $600 this summer.. . my opinion..
Chaim Siegel
Chaim Siegel Apr 04, 2017 4:56PM ET
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Manuel. I like ure target. really $400 is only 33% upside. if you won Tesla though I agree you are looking for $600. by the summer?? not sure. that would be a lot.
watthana boonpluk
watthana Apr 04, 2017 4:56PM ET
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Apr 4
watthana boonpluk
watthana Apr 04, 2017 4:56PM ET
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Yes
Manuel Martin
Manuel Martin Apr 04, 2017 4:52PM ET
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"those betting against TESLA will suffer a tsunami of pain". . (Ellon Musk)
hadi master
hadi master Apr 04, 2017 1:09PM ET
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How can i see more information about Financial statement?
Chaim Siegel
Chaim Siegel Apr 04, 2017 1:09PM ET
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hadi you have our auto imput and the revs. Gross Margins in auto are about 25%, 22% in q2 and more in back half based on company's guidance. the energy and services and near zero gross margins and we have them slowly raming which is why you see our total company gross margins below auto. that's really the only part missing from the model.
Jeffrey Bromfield
Jeffrey Bromfield Apr 04, 2017 12:41PM ET
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This is yet another stock where central bank stealth QE money is flooding into.
Michael Mantion
Michael Mantion Apr 04, 2017 12:41PM ET
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Agreed.
Aaaa DeVil
Aaaa DeVil Apr 04, 2017 12:36PM ET
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Valued more than GM & Ford .. (LOL). Market cap by car sold :. . TESLA : 690k$. GM : 5k$. FORD : 7k$. . Come on!!! This company sells dreams. The GDP is declining, the rates are growing up, and this company will never ever be profitable! This run over 300$ was a typical short squize, while +2% grown up in 1Q2017 was just a result of lack of production in 4Q2016, so this +2% was just a result for 1.5Q not just the 1Q!
Chaim Siegel
Chaim Siegel Apr 04, 2017 12:36PM ET
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Filip, you're right some sales slipped from last quarter but some sales slipped into next quarter.. You are right too that the 25,000 isnt so meaningful. What is meaningful is the 3 in Q3. This stock just broke out. Who cares what stock you talk about... how can you short a stock 25% of the float short and oh by the way, it just broke out. and oh by the way there is a shot in heck that the earnings launch next year. good luck shorts.
Manuel Martin
Manuel Martin Apr 04, 2017 12:36PM ET
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Go ahead, short it .
Aaaa DeVil
Aaaa DeVil Apr 04, 2017 12:36PM ET
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Yeah, betting against in current hype means you lost, I totally agree, just leave this company and look for a better one, but ... if we will see more losses, and Model 3 delay, we will have like unexpected -50% with "Long squize" ;) I think just a small message about some problems might tumble the course aaaaa lotttttttt.
Romain Baumé
Romain Baumé Apr 04, 2017 10:19AM ET
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Quite audacious target price even for Tesla I'd say. I buy the revenues increase from Q4 17 as a result of Model 3 ramp up but disagree with the profits improvement. Indeed, Model 3 margin is expected to be well below Model S & X and will therefore weight on 2017 group's margin. . . What also matters is: will Tesla be able to make money in the coming years? If they sell 500,000 cars in 2018 and reach their target, well good for them but investors will not trust Elon Musk forever, he has to turn his company into a cash machine. Loosing money is not how business works. . . That is why so many people short Tesla's stock and will keep doing it unless the carmaker starts clearing profits and making money.
Chaim Siegel
Chaim Siegel Apr 04, 2017 10:19AM ET
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Romain, if TSLA continues to turn orders to sales 33% is too much or too little of a stock increase?
Romain Baumé
Romain Baumé Apr 04, 2017 10:19AM ET
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Still too much in my opinion! Orders are really important I agree with that but figures announced last year (around 400,000) are overestimated (many cancellations will occur) as credit incentives come to an end. If Model 3 price is likely to be around $35,000 (with a couple of options and once the $7,500 credit is deducted), this price will not concern all customers reservations (once Tesla reach the limit of 200,000 cars sold in the US, the credit will first decrease then disappear). This is for the short term, afterwards Tesla will suffer from competition of bigger carmakers such as GM (Chevrolet Bolt), Volkswagen and so on.
Michael Mantion
Michael Mantion Apr 04, 2017 10:19AM ET
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The car business will never be profitable
Chaim Siegel
Chaim Siegel Apr 04, 2017 10:19AM ET
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Romain, could be. nobody ever caught amazon although everyone was already in the business. Lets see what hapens this year. its a huge test. and orders jump even if they miss 400 or 350 shorts will get squeezed. then as they get squeezed we have time to figure out if they turned the units and if they can drive to profits.
 
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