Morgan Stanley says 2000 cars in 2017, Tesla says 5000 per week. Who exactly is right? Tesla Stock future will be decided by this.
Elon Musk-led electric vehicle maker Tesla Inc (NASDAQ:TSLA) reported a strong Q2 earnings report last week. The company crushed Wall Street consensus on both the top line as well as the bottom line. However, the big news wasn't the headline numbers. Shares of the Palo Alto, California-based EV maker are up by over 9.5% since the latest earnings announcement and a large part of the rally is attributable to positive management commentary on the Model 3 launch. And, if recent Wall Street commentary is anything to go by, the street might be underestimating Tesla's Model 3 production ramp-up. In other words, if Tesla can deliver on its production timeline, Tesla stock could be headed higher, boosted by strong Model 3 sales.
Tesla Says Model 3 Deliveries To Hit 10000/week.
Tesla CEO Elon Musk maintained his stance on the company's ability to deliver on its earlier promised model 3 production ramp up. So, what exactly does that mean? According to the Q2 shareholder letter, the company is confident of reaching a production capacity of 1500+ vehicles in Q3, and ramping that up to 5000/week by the end of this year and hitting over 10000/week sometime in 2018. For comparison, Tesla received over 1800 net model 3 orders per day, on average, since the handover event at the end of July, which translates to weekly orders of over 10000. The demand/supply gap is clearly in favour of Tesla.
More importantly, model 3 demand failed to dampen/cannibalize demand for the higher priced Model S/Model X cars, which was outlined by Tesla as a key risk going into the model 3 launch. In fact, the actual scenario has been the exact opposite of what was feared. Tesla reported an increase in Model S/Model X orders since the Model 3 launch, something Elon Musk attributed to clearing the air on the confusion of Model 3 being a third generation product of Tesla, superior to the previously launched models. With one key risk eliminated, the big question is: Can Tesla, which delivered just 22000 vehicles in Q2, really produce 10000 vehicles/week within a year? Many Wall Street analysts seem to disagree.
Wall Street Underestimating Model 3 Deliveries?
Wall Street analysts have been split on their Model 3 commentary. While some have called Tesla's targets as extremely ambitious and out of reach, a few others believe that the Model 3 could be a key driver for Tesla stock. The biggest bearish check came earlier this year from Morgan Stanley's Adam Jonas, who had until then been a pretty reliable Tesla stock bull. The analyst believes that Tesla will not only struggle to meet its guidance but will also disappoint investors massively. Jonas believes that Tesla will deliver only 2000 model 3 cars in 2017 and 90000 in 2018. That's a far cry from the 5000 run rate promised by Tesla for this year end, let alone the 10000/week target for 2018. However, the post-earnings sell side commentary from other Wall Street analysts has been more encouraging.
Baird analyst Ben Kallo reiterated an 'Outperform' rating and a $368 price target, viewing Tesla stock as a top pick for 2017. Kallo recommends investors to own Tesla stock going into the model 3 ramp, adding that a positive reception from early buyers could significantly increase the value of brand Tesla. While RBC capital markets analysts were also positive exiting Q2, analysts at Goldman Sachs, Morgan Stanley and Cowen weren't too optimistic, citing huge Capex and downside risks to the model 3 production ramp-up. While it is not surprising to see analysts putting forth these risks, the huge divergence in Wall Street estimates (If Jonas estimates are anything to go by) and Management guidance could open up a good opportunity for Tesla stock investors.
How To Play Tesla Stock?
Tesla stock has always had extremely loyal bulls or really scathing bears. Hence, the huge divergence in Wall Street views isn't surprising, considering that Tesla is the subject here. However, this doesn't help investors who need an answer to the question of 'How to play Tesla stock?' The answer really lies in your conviction of Tesla's ability to achieve the exponential production ramp it is touting. If you believe Tesla will achieve these numbers, long Tesla is what you should be. If you think the Tesla's projections are unrealistic and far too ambitious, sell Tesla stock and look elsewhere. However, think twice before you short Tesla stock. The stock has been in an uptrend for a better part of the last 5 years. And all this while, concerns over Capex, ability to deliver and burgeoning debt have been hanging over the company like dark clouds. And Tesla stock has marched higher, driven by the cheers of the TSLA bulls.
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