Analyst Is Confident on Tesla (TSLA) as Model 3 Cars Can Race Past 5K/Week by Q3:18

Though "skepticism" flies on the Street surrounding Tesla's Model 3 production challenges, Guggenheim's Rob Cihra bats for the bulls on Tesla's odds to hit profitability.

Tesla Inc (NASDAQ:TSLA) is a whiz at science, says Guggenheim analyst Rob Cihra. It is simply time for the electric auto giant to “prove” itself on the math equation, or in other words, generating positive gross margin leverage on its new Model 3. After all, the analyst points out the company has a mega fixed-cost framework in the works that needs to get ‘absorbed’ as production volumes fire up.

With full enthusiasm backing this tech leader, the analyst reiterates a Buy rating on TSLA stock with a $430 price target, which implies a 55% upside from current levels. (To watch Cihra’s track record, click here)

Cihra makes a bullish case for the Tesla name: “But while skepticism abounds, we are increasingly confident Model 3 units can indeed cross 5K units/week starting Q3E and then drive enough GM leverage to flip Tesla from 1H18E losses to 2H18E profits. We think a PROFITABLE Tesla could enable a much more positive stock narrative.”

“While June is still a critical month left to go, we believe Tesla seems on track to finally ramp Model 3 production to the 5K/week it has been targeting to start Q3E, having already exceeded 3K/week in Gigafactory battery module manufacturing earlier in May (its biggest source of initial bottlenecks) and since shifting focus to Fremont general assembly,” continues the analyst, who expects the company can produce as much as 35,000 Model 3s in the second quarter with 29,000 in shipping. This marks a rise from the just over 8,000 seen in the first quarter of this year and under 2,000 reached in the fourth quarter of last year.

Though Tesla is running 6 months later, its 5,000 Model 3s per week goal continues to be as crucial as ever, which Cihra notes as “the point around which we forecast Tesla‚Äôs overall model flipping from sizeable cash-burn in 1H18E to profitability in 2H18E; with Model 3 volumes then set up to drive meaningful upside revenue, margin and FCF leverage 2019-20E off the big fixed-cost structure Tesla has been building (with our EPS estimates $9-10 higher than consensus in 2019-20E).”

Meanwhile, the analyst continues to angle for a rapid-fire rise in fixed-cost absorption for Model 3 gross margins. Whereas in the first quarter the analyst projected -23%, for the second quarter the analyst called for -2% to a monster +14% in the third quarter to +20% in the fourth quarter on back of volumes running over 5,000 per week. Though margins are under hot water this year from lofty startup expenses, the analyst deems at least part of these expenses may result as only “temporary,” coming down by early next year; a “balance absorbed by higher units.”

Cihra wagers if the Model 3 gross margin could approach 20% by the fourth quarter, this would be a celebrated victory, giving Tesla just what it needs to generate quarterly EPS close to +$2. In crunching the numbers, Cihra calculates Model 3 gross margins could hit 25% by the middle of next year and keep tracking to surpass 25% in the back half of 2019, as Tesla boosts phase-2 production close to 10,000 units per week. In fact, though Tesla’s fixed costs and overhead per vehicle soar especially “high,” the analyst likewise sees a point for the bulls: as soon as Model 3 volumes kickstart into motion, their fixed-cost absorption overall ought to lift the company’s “leverage that much higher.”

TipRanks reveals caution hangs overhead this auto empire’s name. Out of 22 analysts polled in the last 3 months, 6 are bullish on TSLA stock, 9 remain sidelined, while 7 are bearish on the stock. Notably, the 12-month average price target stands at $296.00, marking 6% in upside potential from where the stock is currently trading; and indicating some optimism is baked into analysts’ expectations.

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