Tesla Motors’ shares have been upgraded to a BUY. Bill Selesky, Senior Research Analyst, Argus Research, talks to Sara D’Elia about why the stock price is expected to rise and some of the potential risks for investors. Argus Research Company reports are available on TD WebBroker.
Joining us via Skype in New York City to talk about Tesla is Bill Selesky from Argus Research. Thanks very much for being here, Bill.
Hi, Sarah. Thanks for having me.
So we have you here today because you've recently upgraded Tesla shares to a buy recommendation. What's different about Tesla today? What's happening in their news story?
Well, we did upgrade the stock on August 7 when the stock was $355. Our price target is $444. So we see 25% upside in the shares.
And basically, what it boils down to is-- and the reason we recommend the stock right now is-- most of the upside we see going forward is going to be based on the Model 3. That's an affordable electric vehicle that Tesla is producing for the mass market. It's $35,000 in price, which makes it comparable to any other electric out there.
And basically what's happening is, you're buying a luxury car at basically average price. So we think that's a pretty big thing going forward. Also, what I would say is, we also have a situation where we expect expenses to trend lower with the economies of scale and a production ramp.
And we also see demand remaining fairly strong. More recently, the company actually announced that they've been seeing 1,800 orders per day for the Model 3 of late. And to me, that seems to be a big deal because there are not too many companies out there right now-- oil companies-- that are seeing positive sales growth year-over-year. And Tesla is.
So it sounds like there are quite a few reasons why you like the shares right now. We have the Model 3, higher demand, costs are expected to go down. But the shares are already up around 80% this year.
So how does that play into your thesis? Does that align with what you were thinking? How do you tie that into your model?
Actually, the Tesla stock has been much better than I expected. Year-to-date, it's up 50% to 60%, which is, again, higher than we expected. But going forward, we think the driver is going to be earnings. And we think they get there faster than most people expect-- probably a couple of quarters-- because we actually forecast a break even for the company in 2018.
And we actually see them making a profit in 2019. Some people do not expect Tesla to make a profit in 2019. So we're ahead of the curve on that one, so I think that gets some people excited.
One of the things that I thought was really interesting when I read your report is 2016 was a record year for auto sales. So the big question in my mind was is it because you think auto sales as a whole in 2017 will be another massive year? So is it a sector story? Or is it really just specific to the Tesla name?
What I would say is it's not sector specific. This is Tesla specific. In 2016, the SAR numbers-- the seasonally adjusted annual rate numbers-- for US light vehicles, $17.9 million. We forecast in 2017 that number will be below that. So we actually think 2016 is a peak year.
We see things slowing down. And we see that happening with Ford, GM, Chrysler, all the car companies. However, with Tesla, we actually see things getting better. Their demand profile is higher, which is good. And again, we expect the expense trend to go lower with the economies of scale of their production ramp.
So we actually see the company breaking even in 2018. We see the company making a profit in 2019, which is pretty much ahead of everybody else.
Something really important to this story, which you've highlighted to me many times as you and I chat about this name, is that they are moving from, really, a bet on growth. So we're talking about a company that since they've been in business, they haven't posted a profit as of yet. Two, a company that will be earning-- so when we pulled up your chart previously, it was the only name you were recommending.
t what are some of the potential risks or pitfalls for investors if they were to buy this name?
Well there are some pitfalls. We would classify this stock as a high risk, high return stock. The biggest pitfalls we see is production. Can they hit the production numbers?
Right now, they're expected to produce Model 3 1,500 per month at the end of this month. The end of December, we're looking at 20,000 per month. So that's a big ramp. And actually, in 2018 for the full year, the company is expecting to produce 400,000 Model 3 vehicles. Now if there's any difficulties with achieving those rates, that will obviously affect the expense trend. That'll impact earnings as well. So going forward, that could be the biggest.
Again, second, I would say the expenses, obviously, would be a big factor here. And third would be profit because if the company doesn't hit the production targets, profit will be pushed out to the right. Could take a lot-- a couple of quarters more than we expect. And that will be a negative.
Bill, you've given us production, earnings, and profit to think about as a risk here for the name, but you have reaffirmed a $444 price target for Tesla. And it was great having you on the show. Thanks for being here.
Thanks for having me.