Are Tesla Inc (NASDAQ:TSLA) Model 3 gross margins primed to ramp up like greased lightning? Berenberg analyst Alexander Haissl says yes, eagerly anticipating this growth to “positively surprise.” For those wide-eyed as to whether the electric car giant has the capacity to realize profits on a Model 3 that has faced challenging production hassles and hurdles along the way, these fears are all bearish hype. Look for this auto machine to achieve its 25% gross profit margin target for the Model 3, predicts Haissl.
Not only is the analyst not concerned, he reiterates a Buy rating on TSLA while boosting the price target from $470 to $500, which implies an 83% upside from current levels. (To watch Haissl’s track record, click here)
Haissl argues, “The widespread assumption that Model 3 margins can be directly inferred from Model S/X is inherently and almost totally flawed. Substantial gains from lower labour content, as well as capital and material use efficiencies, should allow Tesla to comfortably achieve a margin above 25% throughout the product cycle.”
Keep in mind, explains the analyst, the Model 3 costs meaningfully less in material expenses against the Model S, thanks to a cheaper electric motor and elimination of air suspension to aluminum body elements. Moreover, the analyst calculates roughly $1,000 for each Model 3 vehicle in labor content against a Model S at a steep $4,000 based on a jump in automation levels and a dip for in-sourced content.
“We think reports that Tesla is reversing its automated manufacturing strategy over-exaggerated the real changes to the production system,” continues Haissl, adding on an upbeat vote of confidence: “We expect Tesla to remain the battery technology leader, as traditional OEMs have shown little effort to commit meaningful capital into battery technology.”
Overall when crunching the numbers in a thorough deep-dive into cost benchmarking sizing up the Model 3 against the Model S and industry standards, Haissl concludes: “On capital efficiency, labour efficiency and material use, the Model S has a substantial deficit to industry peers, and for that reason cannot reasonably be seen as the yardstick to measure the profitability of the Model 3 – which we prove will be produced with efficiency levels at least on par with best-in-class manufacturers. Altogether, $28,500 of costs are being eliminated from the Model S to produce the Model 3, on our estimates.”
TipRanks points to caution hanging over Tesla shares- but with some optimism baked into analysts’ expectations. 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. With a return potential of nearly 8%, the stock’s consensus target price stands at $296.00.