Tesla’s stock is up almost 5% this morning after a Wedbush Securities report circulating around the Street.
The firm upgraded Tesla from “neutral” to “outperform” based on an in-house survey on how Tesla’s Generation III model will be received by car-buyers around the country.
Generation III is expected to hit the road in 2017.
Wedbush polled 892 main-stream buyers and was “pleasantly surprised that over 20% of respondents indicated they would ‘absolutely consider’ driving an EV (vs. 65% “maybes”), and 19% were willing to pay a $US5,000 or greater premium for a 90% improvement in fuel economy.”
According to Wedbush, 19% of those respondents are willing to pay $US5,000 more for better fuel economy, so it’s likely that $US35,000 to $US40,000 is a realistic price range for the vehicle.
From the report:
We are raising 2017 estimates forecasting 150,000 Gen III units, reflecting updated unit expectations 50% above our prior forecast. Following our survey, we now believe in the longer term the Gen III car could be a 300-500k unit product…
We are raising our target to $US240 (from $US180) and upgrading shares of Tesla to OUTPERFORM from NEUTRAL. Our target is based on 30.0x 2017E EPS of $US10.10 (vs. $US7.55 previously) and discounting back 4 years using a 6.0% discount rate. We believe valuation based on 2017 estimates is appropriate as that is the first year Gen-III vehicle volumes are expected to scale, and view a 30.0x EPS multiple as fair since Tesla should still be in growth mode, leaving room for continued market penetration and vehicle diversification to drive higher earnings.
Of course, this entire argument is contingent on a number of factors, first and foremost that survey respondents behave the way they say they will in the survey.
Another issue is something that brings the bears out of their caves during every Tesla earnings call.
Wedbush wrote: “We expect clusters of catalysts around potential new manufacturing facilities in Asia and Europe as well as further details on the Model X and Gen III vehicles to collectively drive the stock. We expect Tesla management to share detail on plans for future overseas plants such as location and capacity. Detail on the Gen III and Model X platforms may include drivable models and initial orders.”
Details on overseas plants (beyond the fact that they’re coming) are something we haven’t seen from Tesla yet. That is, in part, because the company is in a delicate cash position. It’s spending a lot of money on capital expenditures to build manufacturing plants and tighten up its supply chain.
As Tesla’s CFO Deepak Ahuja said on the Q2 earnings call:
“We want to be very careful about burning cash,” said Ahuja. “We want to stay as close as we can to a free cash flow position… but that’s not something we necessarily want to guide to. We’re going to manage it… and spend the cap ex where we need to to ensure we’re growing at the right pace.
So consider both positions as you wish.
Here’s what Tesla’s doing now: