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Top Analyst Shares Key Takeaways on Tesla (TSLA) Following 2nd Annual Needham Auto Tech Day

Needham's Rajvindra Gill believes that once Tesla's Model 3 achieves its targets, the leverage at play is meaningful.


After hosting the second annual Auto Tech Day, top analyst Rajvindra Gill at Needham is weighing in on Tesla Inc (NASDAQ:TSLA), giving focus to Model 3 production ramp rates. Notably, Tesla stock is on a 7% vault today after CEO Elon Musk indicated to shareholders odds are “extremely likely” for TSLA to reach its weekly Model 3 production goal of 5,000 cars by the end of June.

Gill divvies top insights from his fireside chat and panel discussion with the company’s vice president of international relations Aaron Chew, finding the TSLA team “confident” that challenges confronting the battery module yield have seen resolution. After all, the company is already producing the Model 3 at a 3,000 per week run-rate, and based on Musk’s commentary today, 5,000 per week is glinting on the horizon.

“Despite its history of cash burn, TSLA believes the investments were warranted and the Model 3 ramp will drive meaningful cash flow with other cash levers including WC, prepayments and lease monetization. Beyond these two key debates, we also discussed its neural networks and OTA capabilities, which we view as one of its biggest differentiators. Our view is that Model 3 production won’t happen on a profitable basis until later in 2019; however, as we stated in the past, if the Model 3 hits its targets, the leverage is significant: every 200 bps increase in net margin equates to $1.41 of incremental earnings,” writes Gill.

It appears to the analyst that Tesla finds its all-too-broadcasted production challenges boiling down to the Model 3 battery module finally “behind it.” However, Gill believes that until the Model 3 officially hits the 5,000 goal target, “low utilization rates continue to limit” the gross margin. Margins and average selling prices ought to experience partial short-term advantage, notes Gill, when the company begins to serve up the performance version of the Model 3, “fully loaded” at a whopping $78,000. For Tesla to unlock its target gross margin of approximately 25%, “the Model 3 needs to sell all configurations, including the base model,” points out Gill, who is aware this will not hit until at least next year.

Overall, Gill sees a slew of approaches for Tesla to juice up cash generation, but he finds the crucial strategy first and foremost is to fire up Model 3 production; and it appears this is underway, based on Musk’s exciting reveal. Though the analyst believes a hot investor topic of discussion circles the query of if this giant will need a capital raise, “most importantly,” the company has favorable probability to realize over $10,000 for every car sold. Gill predicts, “If Model 3 ramps well in the next few quarters, its cash flow will substantially increase.”

Looking past the scope of the Model 3, the company underscored its 60 days term on payable extends past its cycle time and the company gains an extra $4,000 when a car gets ordered. Worthy of note, both of these scenarios will boost cash flow for the electric auto giant. The company likewise boasts “sizable” auto and solar leasing with monetization potential via ABS or equity sales. Ultimately, Gill anticipates the electric car giant intends to stay “aggressive” on capital expenses for the upcoming few Gigafactories- and may even choose to raise equity for investment fuel. A final “meaningful and sustainable advantage” Gill highlights in Tesla’s corner: the company’s neural networks on back of over a decade of “tangible field experience” in regard to autonomous driving decisions.

For now, the analyst reiterates a Hold rating on TSLA stock without listing a price target.

Rajvindra Gill has a very good TipRanks score with a 70% success rate and a high ranking of #23 out of 4,822 analysts. Gill garners 22.8% in his annual returns. When recommending TSLA, Gill earns 0.0% in average profits on the stock.

TipRanks suggests caution roars loud on Wall Street for sell-side analysts sizing up the challenged electric auto giant’s prospects. Out of 23 analysts polled in the last 3 months, 6 are bullish on Tesla, 10 remain sidelined, while 7 are bearish on the stock. With a loss potential of 4%, the stock’s consensus target price stands low at $297.00.