Where Is TSLA Stock Going?
Shares of Tesla Inc (NASDAQ:TSLA) have had a choppy ride in the past several months. TSLA stock lost more than $100.00 per share from mid-August to mid-October, but has recently made a strong comeback. The ramping up of Tesla “Model 3” deliveries certainly had something to do with it. And according to some analysts, there is still a lot more upside ahead for TSLA stock.
Let me explain…
For those not in the know, Tesla started out by making some quite expensive vehicles. The original Tesla “Roadster” cost well over $100,000 apiece when it went out of production in 2012. The “Model S” and the more recent “Model X” will also run into the six-figure range after you tick a few option boxes.
The Model 3, on the other hand, represented the company’s foray into the mass market. Sure, the ones that have been delivered so far have largely been highly-optioned models. But to give you an idea of how big a market Tesla has broken into, here’s a fact: In just a few months after Tesla announced the Model 3 back in 2016, the company got over 400,000 reservations.
Of course, showing a new electric vehicle to an enthusiastic crowd through a “PowerPoint” presentation is a lot easier than actually building the car. And for a long time, Tesla stock bears argued that the company didn’t have the ability to scale up its Model 3 production. However, based on the latest reports from Tesla, that bearish argument is no longer valid.
Tesla on Track to Meet Delivery Targets
Earlier this year, Tesla’s management said that they expected the company to produce 50,000 to 55,000 Model 3 vehicles in the third quarter, with deliveries exceeding that level. (Source: “Tesla Second Quarter 2018 Update,” Tesla Inc, August 1, 2018.)
That looked like quite a challenging task given the fact that Tesla produced 28,578 units of the Model 3 in the previous quarter.
But as it turned out, the company had no problem achieving these ambitious targets. In the third quarter, Tesla produced 53,239 Model 3 vehicles, which was within the previously stated guidance range. The amount represented an 86% increase sequentially. (Source: “Tesla Q3 2018 Vehicle Production and Deliveries,” Tesla Inc, October 2, 2018.)
Model 3 deliveries, on the other hand, totaled 55,840 vehicles in the third quarter of 2018. Again, the number met management’s expectations.
While the mass-market Model 3 has become the star of the show for Tesla stock, the company’s higher-end models remain popular. In the third quarter, Tesla also delivered 14,470 Model S and 13,190 Model X vehicles.
Add that all up, and you’ll see that Tesla delivered a total of 83,500 vehicles in the third quarter. To put this in perspective, that’s more than 80% of the vehicles the company delivered in all of 2017.
Going forward, the outlook looks bright for Tesla Model 3 production. This is because, in just the last week of September, the company produced more than 5,300 Model 3 vehicles, most of which were dual motor. That translated to a production rate of over 10,000 drive units per week! (Source: Ibid.)
TSLA Stock Backed by Improving Financials
Of course, while growth in production and deliveries is certainly good news, investors are also looking for improvements on the financial front. Very often, we see companies with double-digit top-line growth struggling to turn a profit on the bottom line. Is that the case for Tesla?
Tesla reported third-quarter results on October 24. For the quarter, Tesla generated $6.8 billion of revenue, representing a staggering 110.6% increase year-over-year. (Source: “Tesla Third Quarter 2018 Update,” Tesla Inc, October 24, 2018.)
The real surprise was the bottom line. Wall Street expected the company to report a loss of $0.19 per share for the quarter. In reality, Tesla reported a net income of $2.90 per share.
At the same time, the company also generated $881.0 million in free cash flow.
This surprise profit sparked a rally for the company’s shares. Since Tesla’s third-quarter earnings release, TSLA stock has surged more than 20%.
In the earnings press release, management said that they “expect to again achieve positive GAAP net income” in the fourth quarter of this year.
What about next year?
Well, during the conference call, the company’s co-founder and chief executive officer, Elon Musk, said:
“I think we can actually be positive cash flow and profitable for all quarters going forward, leaving aside quarters where we may need to do a significant repayment, for example in Q1 next year.” (Source: “Tesla Inc. (TSLA) CEO Elon Musk on Q3 2018 Results – Earnings Call Transcript,” Seeking Alpha, October 25, 2018.)
“But I think even in Q1, I think we can be approximately flat in cash flow by end of quarter,” he added.
If the future turns out to be like that—where Tesla stays profitable and cash flow positive in all quarters going forward—it would certainly give investors a good reason to continue liking TSLA stock.
Tesla Model 3 Deliveries Growth Estimates
On the outlook of the Model 3, Musk said that they “expect to produce and sell even more Model 3s in Q4.” (Source: Ibid.)
For those wondering exactly how many Model 3s the company can sell in the fourth quarter, a web site called Inside EVs tracks the sales of plug-in electric vehicles in the U.S.
According to Inside EVs, U.S. Model 3 sales totaled 17,750 vehicles in October and 18,650 in November. (Source: “Monthly Plug-In EV Sales Scorecard,” Inside EVs, last accessed December 19, 2018.)
As of this writing, the Tesla Model 3 is only available in the U.S. and Canada. As a result, U.S. sales figures could be pretty close to actual delivery numbers.
For instance, in the third quarter, Inside EVs estimated that Model 3 sales totaled 54,300 units in the U.S., which was just 2.8% less than the company’s official delivery numbers of 55,840 units for that period.
Now, keep in mind that in the first two months of this quarter (October and November), Tesla’s Model 3 unit sales in the U.S. were higher than they were in the first two months of the last quarter (July and August), according to Inside EVs. Also, December tends to be a strong month for auto sales.
Suppose the company sells 23,000 Model 3 vehicles in the U.S. That will bring Model 3 fourth-quarter sales to 59,400 units. If the relationship between Model 3 deliveries and Inside EVs’ sales data stays the same, a 59,400-unit sales estimate in the U.S. would correspond to 61,085 units of Model 3 deliveries.
That’s an estimate for the fourth quarter. Looking past the fourth quarter, the company is well-positioned to further capitalize on this mass-market EV.
Like I said, Tesla is only selling its Model 3 in U.S. and Canadian markets at the moment. But the company is expected to bring this EV to Europe and China in early 2019. There is substantial demand for mid-sized premium sedans in these regions. By entering these new markets, Tesla Model 3 sales would get a substantial boost in 2019.
Analysts Raising Price Target
The investment community has recognized Tesla’s strength and potential. And now, analysts are raising their price targets on TSLA stock.
On Thursday, December 13, Baird analyst Ben Kallo raised his price target on Tesla stock from $411.00 to $465.00. He said, “The narrative on TSLA, particularly in the middle of 2018, was as negative as we have experienced in our coverage, but we believe sentiment will continue to improve.” (Source: “Tesla Stock Flirts With Breakout After Big Price-Target Bump,” The Street, December 13, 2018.)
In particular, Kallo believes that Tesla’s surprise profit in the third quarter is here to stay.
“We do not believe the strong Q3 results were a ‘flash in the pan’ and think TSLA could maintain profitability,” the analyst added. (Source: Ibid.)
Then, on Friday, December 14, analysts at Wedbush Securities launched coverage of TSLA stock with their equivalent of a “Buy” rating. The team’s lead analyst, Daniel Ives, said he believed that “Tesla has the most innovative product roadmap in the technology space over the next 5 to 10 years.” (Source: “Tesla will revolutionize consumer buying habits like Amazon and Apple, analyst says,” CNBC, December 14, 2018.)
Wedbush has a price target of $440.00 on the EV stock. The team compares Tesla to some of the biggest names in tech today when it comes to the influence on consumers.
Tesla shares trade at $348.42 at the moment. So the price target of the Baird analyst implies an upside of 33%, while the Wedbush analyst’s price target suggested an upside of 26.3%.
Being a pioneer gets you not only a lot of cheers, but also a lot of skeptics. I’m not saying that Tesla Inc is the pioneer in making electric cars (EVs first appeared in the mid-19th century), but it is one of the first companies to attempt selling EVs by hundreds of thousands of units in North America.
For TSLA stock bears, here’s a reality check: In the third quarter, the Tesla Model 3 was America’s best-selling car in terms of revenue and the fifth best-selling car in terms of volume. The company is not just a leader in the EV business. Instead, it is set to revolutionize the entire automotive industry.
At the end of the third quarter, there were nearly 450,000 Tesla vehicle owners around the world. And that number is only going up. The company is transforming from a 100,000-unit-per-year automaker into an approximately 340,000-unit-per-year automaker, and its earnings capability has improved dramatically along the way.
Going forward, Wall Street’s Tesla stock target price will likely continue to have close ties with Tesla car delivery estimates. At the same time, market sentiment will also be critical in determining TSLA stock’s next move. That is, if we have a market-wide sell-off in 2019, shares of this Palo Alto, California-based EV maker will likely take a hit.
Still, based on what the company has been doing, TSLA stock bulls have a good chance of being rewarded in the long run.