Tesla (TSLA) Shares Could Jump with Execution Following Consumer Reports Model 3 Win

Baird's Ben Kallo cheers Tesla's "unique" over-the-air update technology for impressing Consumer Reports on its Model 3- now with improved braking.


Great news, Tesla (NASDAQ:TSLA) investors. The electric auto empire just earned a new recommendation from Consumer Reports (CR) on its Model 3, thanks to an over-the-air (OTA) software update that has revamped braking distance to the tune of more than 10%.

Baird analyst Ben Kallo consistently gets questions regarding the cutthroat electric vehicle market, but he remains bullish on Tesla’s power in constantly bettering its products through OTA updates. Not only is this a “unique” ability Kallo recommends in TSLA, but he likewise believes this showcases the electric car giant’s leadership position.

“We continue to think shares could appreciate significantly with execution, which should coincide with an improvement in sentiment,” writes the analyst, who reiterates an Outperform rating on TSLA stock with a $411 price target. This implies a 42% upside from current levels, with Kallo cheering Tesla stock as a “Fresh Pick,” where “negative coverage may have peaked.” (To watch Kallo’s track record, click here)

Though CR did not initially give its recommendation to the mass-market electric car amid long stopping distances, the software update issued seems to have changed the picture. Before, the Model 3 needed 152 feet of distance to stop from 60 mph, which trailed the Ford F-150 by 7 feet and was 25 feet more than the Model X. Following the software update, the braking system has taken a leap forward in adaption to shifts in environmental conditions as well as usage.

“TSLA’s technology is attempting to create a niche in the automotive market by displacing incumbent combustion-engine vehicles. A slow or lack of adoption by customers of these vehicles due to performance/safety concerns, range anxiety, or oil price decrease would jeopardize the TSLA’s growth plans,” explains Kallo, which makes it a savvy move for Tesla in improving the Model 3’s breaking distance.

In the retest, the Model 3 improved by almost 20 feet to 133 feet, matching with industry averages. Accordingly, CR has revised its rating, with Kallo noting, “CR testers indicated they had never seen a car improve track performance via an over-the-air update.” In fact CR director of auto testing Jake Fisher has yet to see a car boost its track performance through an over-the-air update in his 19 years and over 1,000 car tests.

“We believe TSLA’s ability to continuously improve its vehicles through software updates is a differentiating factor for the company. Investors often ask about upcoming competition in the electric vehicle space. While we are cautious to not discount competition, we believe few other automakers would be capable of improving their vehicles in this fashion,” highlights the analyst, who already sizes up the Model S and Model X as luxury electric vehicles outperforming the range of most of its rivals. Additionally, the the analyst believes Tesla Energy’s meaningful sales gains and gross margin expansion waiting this year leave the business “underappreciated,” with sales primed to triple by the close of 2018.

Moving forward, Kallo bets on the following forthcoming share drivers for Tesla: 1) rising Model 3 production as well as gross margins 2) prospective expansion details in China and other locations 3) a possible new line of future productions, including the likes of the Model Y 4) a Gigafactory ramp coupled with further Tesla Energy project reveals 5) a Tesla Roof production and installations ramp.

TipRanks reveals TSLA as a stock that has Wall Street playing it safe. Out of 23 analysts polled in the last 3 months, 6 are bullish on TSLA stock, a majority of 10 remain sidelined, while 7 are bearish on the stock. Notably, the 12-month average price target stands at $288.33, which aligns evenly with where the stock is currently trading.

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