In regard to Tesla…
Having defended our more cautious stance for over a year, we find ourselves torn in upgrading as it is clear substantial risks remain. This is, in part, given (1) the lack of available data to question management’s claims with respect to battery pack durability (among other long-term warranty / residual / service / charging infrastructure related issues), and/or (2) despite lofty expectations, Tesla has never generated even one-sixth of the profitability per share based on the Street’s 2016 EPS outlook (even less based on our updated 2017 estimate), while tax incentives are waning and Gigafactory construction is looming. We have no clarity on battery input costs and take management at face value relative to the estimated $200-300/kWh (kilowatt-hour) starting point while targeting $100/kWh ICE (internal combustion engine) cost parity inside of a decade. We are also relegated to performing various mathematical gymnastics to ascertain the cadence of Model S demand in its most mature market, the U.S., each quarter.
While there are no fewer than a half-a-dozen other key concerns we share with industry purists, the reality is that these issues simply do not matter with respect to Tesla’s stock. Tesla sentiment is like a freight train, in our view, benefiting from a well-manicured growth story that has caught the eye of a much broader investor base relative to most auto stocks. Tesla has positioned itself as the smart vehicle of the future, with a glimpse into smart purchasing and smart infrastructure. Tesla has captivated a global audience, some of whom have lost interest in distinguishing horsepower ratings among the dozens of $100k-plus luxury vehicles, others that would have never considered spending six-figures on anything but a house. Like Tesla’s right place/right time purchase of the NUMMI facility, or the astounding political energy around renewables (again), our call ultimately comes down to timing. We believe our risks remain legitimate, just much further out than we anticipated. Tesla will eventually face stiffer competition from traditional OEMs, we think, and will reach a ceiling of consumer support. But it is clear from our recent factory visit and conversations with investors, customers, and management that these concerns are at the earliest, late decade issues at best.
To that end, we note our call does not hinge on Gigafactory timing, nor Model III pricing/volume expectations for 2020 and beyond. We are focused on the Model S and X alone. We are simply more optimistic of Tesla’s success as a “slightly bigger than niche” global luxury auto manufacturer, and like the head start management has carved out for the brand.
(from Stifel Nicolaus Analyst James Albertine)
