Shares of Tesla (NASDAQ: TSLA) jumped today thanks to an analyst upgrade. Argus Research analyst Bill Selesky has now boosted his rating on shares of the electric-car maker from hold to buy, while tacking on an ambitious $444 price target.
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The analyst cites strong demand for Model 3 as a key reason for the upgrade, pointing to the approximately 1,800 new orders per day that Tesla has been receiving since its handover party on July 28, a figure that the company shared in its second-quarter earnings letter. Selesky is encouraged that Tesla has been able to generate this level of interest without traditional advertising or marketing campaigns. "We think this highlights the strong demand for an electric car that provides buyers with high-end features and styling at a relatively affordable $35,000 retail price -- well below those of the company's earlier models," the analyst writes.
Costs should come down in 2018
While the company is spending heavily to invest in the Model 3 production ramp, forecasting $2 billion in capital expenditures in the second half of 2017, the analyst expects that costs will "diminish over the course of 2018" and be able to hit its Model 3 gross margin target of 25% in late 2018. That would be comparable to the profitability levels of the current Model S and Model X.
Tesla posted an adjusted gross margin of 25% in the second quarter, after backing out stock-based compensation expenses and ZEV credit revenue.
Tesla could be profitable in 2019
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Argus is trimming its loss estimate for 2017, in part because Tesla posted a better-than-expected net loss in the second quarter. Selesky now expects Tesla to lose $5.36 per share in 2017, down from a previous loss estimate of $5.48 per share. Those revisions come from more favorable assumptions regarding gross margin for the balance of 2017 due to "continued sales growth for all three models."
For 2018, Selesky expects Tesla to break even, an improvement from his prior estimate of a loss of $0.50 per share, due to expectations that costs will come down while sales simultaneously increase. Tesla could reach breakeven two quarters earlier than the analyst's previous estimates. Furthermore, Selesky believes that Tesla can achieve full-year profitability in 2019.
Non-employee Model 3 deliveries should start in Q4
Model 3 is expected to start shipping in more meaningful volumes starting in the fourth quarter. Tesla only expects to produce approximately 1,500 Model 3 vehicles in the third quarter, and many (if not all) of these units will go to employees in California purchasing the vehicle.
On the earnings call earlier this month, CEO Elon Musk said that would help create a "tight internal feedback loop" to address any early problems that Tesla experiences. "The people driving them and the people -- are the same ones who have to fix the problem," Musk added. "That's a great feedback loop."
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