Consumer Edge Research

Tesla's Model 3 Is Off And Running; Will Lack Of Money Short Circuit Its Sales?

Forbes
Aug 31, 2017

Now that the Model 3 is on the road, investors want to hear more about Tesla's TSLA -0.31%plans. How soon will it be in mass production? What else does Tesla have on the drawing board?

Jamie Albertine, senior auto analyst for Consumer Edge Research, said in an interview that such questions are bound to rise. "As with any company that's embarking on a major turning point, investors tend to shift on forward leading indicators."

On Tesla's August 2 Q2 earnings call, CEO Elon Musk talked about the importance of the Model 3 to the company's future. "So first of all, I want to say that Friday night was an amazing time for Tesla. It was one of the most important days in the history of the company. It's something we've been striving for, for 14 years."

Tesla's Model 3, its first mass market EV, starts around $35,000 and has a long list of people waiting to buy one. Albertine is confident that Tesla can stay on track. "Tesla's core product demand remains high. And its margin performance on a gross margin basis has continued to surprise by being in line with management guidance."

Consumer Edge has an overweight (buy) rating on Tesla, and gives its stock a $385 fair market value. Tesla closed on Thursday at $355.90, up 0.8% for the day.

Goldman Sachs consumer goods analyst David Tamberrino doesn't have the same level of confidence in Tesla. In fact he has a sell rating and a $200 price target, far below Tesla's closing price.

One thing he and Albertine agree on is that investors are focused on the future, on products coming down the pike. But Tamberrino thinks it's questionable whether Tesla will generate enough cash to keep all of the balls it's juggling in the air. "As Tesla is likely to continue to move forward with its new products," such as its upcoming Model Y compact SUV, a semi-truck, Solar Roof, autonomous vehicle development etc., "the incremental R&D spend and capex for capacity could continue to weigh," on financial results, he said in a report released last Monday.

Tesla has shipped about 130,000 total EVs in its history. The federal tax credit for consumers begins to phase out when a company reaches a total 200,000 EVs shipped, which Tesla could quickly hit as it ramps the Model 3. Tamberrino said the credit "likely expires for Tesla as the incremental EV competition from other OEMs heats up."

There is no doubt that, for now, Tesla dominates the EV market. It's just as sure that competition in the sector is growing at a fast clip.

In the luxury category, BMW is revamping its i3 EV with the introduction of the sporty i3s, due out in 2018. Audi and Mercedes Benz have been showing off sleek prototype EVs that could soon enter the market to compete with the Tesla Model S. In the mid-tier, upgrades are underway on General Motors GM +3.01% Bolt and the Nissan Leaf to compete with the Tesla Model 3.

In trucking, Tesla was hoping to shake up the industry with an all electric semi-class truck, reportedly set to debut in late September. But Cummins CMI +0.25% just stole its thunder by announcing the first heavy duty EV truck.

Albertine says Tesla is betting heavily on Model 3 sales to leapfrog the company into the ranks of mainstream automakers like GM, Ford and Toyota.

"It's a high risk, high reward moment in Tesla's trajectory," Albertine said. "It's important for the company to make sure employees share that optimism and have the stamina to push through, that there is no low morale."

https://www.forbes.com/sites/jamesdetar/2017/08/31/teslas-model-3-is-off-and-running-will-lack-of-money-short-circuit-its-sales/#2231c414480e