Days after Tesla (NASDAQ: TSLA) shot up nearly 10% in the wake of upbeat news about Model 3 production at the electric-car company’s annual shareholder meeting, one analyst is hiking his 12-month price target on the stock from $420 to $450. The analyst making this bullish call is Nomura Instinet analyst Romit Shah. The analyst cites a forecast for higher-than-anticipated average selling prices for the Model 3 and Tesla’s plans to build a factory in China as reasons to be optimistic.
But with a $450 price target representing about 41% upside from where Tesla stock is trading at the time of this writing, is Shah’s rosy outlook a bit excessive?
Getting to $450
With Tesla recently confirming it will begin delivering the all-wheel drive and performance version of its Model 3 as early as next month, the more expensive versions of the new Tesla vehicle should give Model 3’s gross profit margin a boost. Not only does adding all-wheel drive cost $5,000, but the performance version of the Model 3 will cost $78,000 without including autopilot — far more than the starting price of the long-range version of the Model 3 at $44,000.
But Instinet also believes demand for the all-wheel-drive and performance configurations will be higher than expected, driving the vehicle’s average selling price even higher. “We now estimate blended Model 3 ASP’s approaching $60,000 in [the second half of 2018],” said Shah (via Business Insider).
It’s worth noting that Tesla management is optimistic about the Model 3’s average selling price, too. “[O]ur average selling price is significantly higher than prior projections,” Tesla said in its first-quarter shareholder letter, “so we expect to achieve higher gross profit per vehicle than we previously estimated.”
In Tesla’s first quarter, management said the Model 3’s gross margin was negative “due to temporary underutilization” of the vehicle’s manufacturing capacity. But management forecast the vehicle’s gross margin to improve to “close to breakeven in Q2 and then to highly positive in Q3 and Q4.” Longer term, Tesla believes the Model 3’s gross margin will rise to 25%.
One analyst disagrees
Interestingly, just as Shah is tooting the likely positive impact of high demand for Tesla’s all-wheel-drive and performance versions of its Model 3, Bernstein analyst Toni Sacconaghi is saying (via Barron’s) that the electric-car company’s decision to prioritize deliveries of the more expensive Model 3 versions could be the wrong move. “In attempting to skim its most profitable customers first, we believe that Tesla is walking a fine line between mollifying investors and upsetting enthusiasts who placed deposits believing they would get a $35K car and capture a $7500 US tax credit,” said Sacconaghi.
Tesla doesn’t expect to begin producing the $35,000 version of its Model 3, which has less driving range than the long-range version Tesla is currently producing, until the end of this year. With the $7,500 federal tax credit that applies to buyers of Tesla vehicles in the U.S. set to expire when the automaker sells its 200,000th vehicle, prioritizing deliveries of higher-end versions of Model 3 may mean the federal credit expires before the base model begins shipping.
Still, Sacconaghi admits that selling higher-end Model 3s in the near term will be accretive to the important vehicle’s gross margin. And since Tesla CEO Elon Musk has said it’s physically not possible yet to sell the standard version of Model 3 profitability, Tesla may have no other choice.
Even if prioritizing pricier versions of Model 3 makes sense for Tesla, and if a factory in China benefits the company, these factors may not be enough to justify Shah’s $450 price target for Tesla stock. Despite Tesla’s surging growth and management’s optimistic outlook for Model 3 production to hit 5,000 units per week by the end of June, investors should look for Tesla to start hitting its production targets more consistently before they expect Tesla’s stock to soar to $450. After all, Tesla has already delayed its production targets for Model 3 twice.
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