Friday’s Analyst Insights: Tesla Inc (TSLA), Square Inc (SQ) on the Radar


Tesla’s Story Will Be Built Over the Next Six Years

Gene Munster – sharing his stance from his research-driven, venture capital firm Loup Ventures – offers a take on Tesla Inc (NASDAQ:TSLA), expecting that this is a chapter tale that will take time to brew and build. With three gigafactories to be launched over the next three to six years from the electric car giant, it is clear to Munster that Tesla is staking its claim in the self-driving car arena. No other auto manufacturer is close on breaking EV battery production ground quite like CEO Elon Musk’s brainchild. As such, the analyst sees a “stealth advantage” for Tesla’s chances to alter the world as we know it.

However, not all will be gilded for Tesla, as obstacles lie ahead as well. Munster highlights, “People tend to overestimate what happens in short-term, and underestimate what happens in the long-term. We believe that notion will define the Tesla story over the next six years. We caution that it will take time for the Tesla story to unfold, and that there will be disappointments along the way, but Tesla’s Jun-17 quarter results and outlook around production and demand suggest the company is on a track to be a significant beneficiary in the global paradigm shift to EV and autonomy, all while producing affordable vehicles. Traditional auto is in a tight spot, dogged by legacy engineering (both on vehicles and manufacturing), and high labor costs. Tesla’s biggest challenge is ramping production, and, to a lesser extent, the threat of other tech companies (WayMo, Baidu, Apple).”

Overall, the grander context is a complicated one at that- one rife with global possibilities, but with prospects that: Musk will be turning to shareholders to secure added funds, production targets could be off on a one-to-two quarter delay, full autonomy could be pushed back two years to 2021; Musk might have to turn to creating another factory to lift yearly production beyond 600,000 vehicles; demand could take a hit by 2019- the year domestic tax incentives will be lessened; and last but certainly not least, cutthroat competition.

Yet, though Munster tells investors to “brace” themselves for some dashed hopes along the way, down the line, Tesla’s future powers along with impressive strength, as he surmises: “While these disappointments will fuel controversy around the story, we believe they do not change the long-term potential of Tesla.”

TipRanks analytics show TSLA as a Hold. Out of 17 analysts polled by TipRanks in the last 3 months, 5 are bullish on Tesla stock, 8 remain sidelined, and 4 are bearish on the stock. With a loss potential of nearly 12%, the stock’s consensus target price stands at $310.00.

Square Still Has Canaccord Nervous, But Boosting the Price Target

Square Inc (NYSE:SQ) is doing well- but is there sufficient short-term profit to warrant the stock’s value? That is the question Canaccord analyst Michael Graham finds himself asking, as he stays to the side until he sees the spiral of strength becomes more established.

Following the company’s second-quarter financial results put on the table Wednesday, the analyst reiterates a Hold rating on SQ while bumping up the price target from $18 up to $26, which represents a close to 3% increase from where the stock is currently trading. (To watch Graham’s track record, click here.)

For the second quarter, adjusted revenue growth soared from last quarter’s 39% to 41T, with EBITDA margin of 15% beating consensus expectations looking for 13%. However, the analyst highlights a bearish contention- guidance points to EBITDA margin compression waiting in the back half of the year.

Graham opines, “Square’s Q2 results were strong once again, helped by 45% GPV growth from larger sellers that continue to self-onboard and therefore pay Square’s rack rate of 2.75%. Square Capital originations grew 68% y/y, contributing to 99% S&S revenue growth and helping adjusted revenue growth accelerate 130 bps to 41%. In short, the business is clearly performing admirably. That said, while we have missed the stock’s run since last fall, we are nervous about not enough near-term profit support for the valuation and continue to wait for the stock’s inherent volatility to provide an opportunity to become more constructive.”

True, “The scale of the business is slowly driving leverage in transaction costs and we expect continued gradual margin expansion in the out-years,” Graham notes, but he concludes with a warning: “That said, updated guidance implies ~100 bps of EBITDA margin compression in H2/17. While this may be management conservatism, it may concern some investors in the short term.”

TipRanks analytics demonstrate SQ as a Buy. Based on 15 analysts polled by TipRanks in the last 3 months, 9 rate a Buy on Square stock while 6 maintain a Hold. The 12-month average price target stands at $28.75, marking a nearly 14% upside from where the stock is currently trading.