Wall Street is so confused about Tesla that it isn’t even funny.
Baird analyst Ben Kallo published a research note on Thursday in which he defended an optimistic future for Tesla and a price target of $US275 — $US75 higher than where Tesla shares are currently trading and not too far off the Tesla peak of $US291, reached in September 2014.
This puts Kallo in the Tesla bull camp, although his target is well below Stifel Nicholas’ James Albertine, who maintains that the stock could go to $US400.
The biggest Tesla bear is Bank of America Merrill Lynch’s John Lovallo, who has a target price on the stock of $US65.
But with alarming swiftness, Tesla investors, once so thrilled about the innovative startup’s future moneymaking prospects, have figured out that this is a very small company selling one car that it builds in one factory.
Kallo’s note isn’t a total wall of confusion. He and his team visited Tesla’s Fremont, Calif. factory and came away with the impression that Elon Musk & Co. can ramp up Model S production and realise a lot more upside from the expected debut of the Model X SUV later this year.
Maybe he’s right.
But then there’s this about the Model 3 mass-market car, which is expected in 2017:
Gen III model should outperform competitors, providing a fully electric vehicle at a competitive price. TSLA’s Gen III vehicles are expected to compete with the Audi A4 and BMW 3 Series, which both range in cost from ~$US32k for a base model to ~$US53k fully loaded. We estimate Gen III vehicles will begin at an ASP of $US35,000, but we think TSLA will offer models for higher prices that carry greater than a two-hundred mile range. We expect the performance of the Gen III models to exceed the A4 and BMW 3 Series. With approximately 216k A4 Sedans and 294k BMW 3 Series sold globally, we think our current sales estimate for the Gen III (185k in 2018) is achievable.
I’ve been following Tesla since 2007, and this is the most perplexing thing I’ve ever read about the company. There are two crazy assumptions in just this one paragraph.
Tesla is projecting 55,000 in sales for 2015 — that’s Model S and Model X combined (most of it will be Model S). The Model 3 prototype hasn’t even been seen yet. It’s far from clear that Tesla will be able to build all three cars on the same platform. It’s also not clear that a smaller, less expensive car will be able to feature a battery that serves up 200-mph range.
But let’s say those obstacles are all overcome. Is Tesla going to go from zero Model 3s in production in 2016 to some Model 3s in production in 2017 to 185,000 Model 3s not simply produced but sold in 2018?
If Kallo feels safe saying that Tesla is worth $US275 a share, I feel safe saying that Tesla will not sell 185,000 Model 3s in 2018, even if the BMW 3 Series and the Audi A4 — which have annual sales of around 300,000 and 200,000, respectively — are a reasonable proxy for potential Model 3 sales.
After all, Tesla’s exceptionally optimistic case for production by 2020 is 500,000 cars. If it manages to something like 200,000 with the Model S and Model X by 2018, adding in 185,000 Model 3s suggests that the company will be running ahead of schedule on production goals that analysts have already challenged as being far too optimistic.
But what about the idea that the Model 3 will outperform the Audi A4 and the BMW 3 Series?
The A4 and the BMW 3 Series sell exceptionally well because they are basically bulletproof. The BMW 3 Series in particular is easily the most successful, beloved, and compulsively praised luxury sedan in the history of the genre.
It’s entirely possible that a higher-priced, high-performance versions of the Model 3 will outdo the A4 and BMW 3 in a straight-up driving comparison. Demand for the Model 3 could also be pretty tasty.
But will anyone thinking about buying an entry-level luxury sedan be wooed by the Model 3 — a car, it must be noted, that doesn’t yet exist in even prototype form?
Of course not. After a decade in the market, the Model 3 might start to match up with Audi and BMW. But it’s not going to happen in the car’s second year of production.
Additionally, Kallo assumes that the Model 3 will be a mid-size sedan. If it is, it would be somewhat out of alignment with the current auto market, which loves compact SUVs. This trend will probably continue for a few more years — and it may even signal a structural change in the US car market. For example, Tesla has come in for some gentle criticism for selling a luxury sedan in the Model S, rather than a luxury SUV.
For what it’s worth, Kallo’s confusion is of a piece with the rest of Tesla’s financial followers.
Wall Street already has a tough time following the traditional auto industry. Last year, I talked to legendary General Motors executive Bob Lutz (now retired) who put it this way: “Analysts are highly numerous, young, and they performed beautifully [in college]. They can look at sea of numbers, but they don’t really understand the business.”
Right now, Tesla-the-stock-story is colliding head-on with Tesla-the-business-story. Shares are up massively over their IPO price of $US16. For the past year and half, the stock has been on a tear. But ever since last fall, a lot of typical car-company stuff has been coming out the company. Tesla is struggling to match up production with demand. It had to shut down operations for a few weeks last year in order to retool an assembly line to build its forthcoming Model X SUV.
If we’re looking for a clear signs that Wall Street and Tesla just don’t get each other anymore, we’re seeing a lot of them in early 2015.
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