This Analyst Still Sees 40% Upside for Tesla (TSLA) Stock


On Thursday, Tesla (TSLA) CEO Elon Musk announced that the company would be closing all of its retail stores, instead selling its vehicles only online. While Musk and Tesla had said this was the long-term strategy all along, and had in the past indicated it would happen, it was always pushed back for one reason or another. But the company believes this is the perfect time to do it, as it is expected to cut expenses as much as 6%, which, the company hopes, will contribute to consistent profitability, especially on its lower-priced Model 3.

Wall Street seems a bit less optimistic on the strategy, as shares fell nearly 8% on Friday followed by another 3% decline today. Even so, JMP analyst Joseph Osha maintains his Outperform rating and $406 price target on the stock, which implies about 40% upside from current levels. (To watch Osha’s track record, click here)

Read also: Tesla (TSLA) Stock Suffers Another Setback, But the Future Remains Bright

 

From the beginning, Tesla’s retail strategy was different than the normal way rival automakers sold their cars and from what customers were accustomed to. Instead of having a network of dealers — the traditional method — Tesla had small showrooms, similar to that of an Apple Store, Best Buy or Macy’s. Not only was this a revolution in the auto industry, but many rivals lobbied state governments to prevent Tesla from opening these types of stores, arguing they must go through the dealership network model because of franchise laws that restricted direct-to-consumer auto sales.

But Tesla didn’t want to rely on a third-party dealership, as the company argued their electric vehicles are substantially different than what is out there, and needed Tesla-employed personnel to handle sales. So in order to get by the law, Tesla opened more than 100 showrooms in the US but required orders to be placed online. So while going the e-commerce route is not necessarily new for the company, not providing customers the ability to see a car in-person or talk to a Tesla employee about the cars does represent a significant shift.

Speaking about the move to close stores, Osha wonders “how switching to an entirely online sales model is going to work for selling cars.” He says he has no doubt that “Tesla’s existing fans are willing to buy online, but wonder[s] about prospective buyers in other parts of the U.S. where EV penetration is lower and customers still need some convincing. Perhaps younger customers used to buying everything else online will be comfortable, and it’s true that business models like Carvana (CVNA, MO, $64 PT, Josey) have demonstrated that the traditional dealership market can be circumvented.” As a result of the move, the analyst believes Tesla “is going to end up surrendering some customers as a result of its move – the question is simply whether that loss is worth the gain that comes from its more aggressive pricing strategy.”

Overall, Wall Street is split on Tesla. While on one hand, many see the massive potential and opportunity the company has in the future, many others are worried about production, fundamentals and leadership concerns. TipRanks analysis of 23 analyst ratings shows a consensus Hold rating, with eight analyst saying Buy, six recommending Hold and nine Selling. There is an average price target of $321.38, representing a 9% increase from current levels. (Get TipRanks’ free analysis report on TSLA)

 

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