When you think of electric cars, the first brand that probably comes to mind is Tesla (TSLA). And yet, in the back of your brain, you probably still know that Tesla wasn’t first to market an electric car at all.
Historians credit Dutch Professor Sibrandus Stratingh with inventing the very first battery-powered electric car way back in 1834. And in more modern times, General Motors actually made the first attempt at popularizing the technology with its vaunted EV1 developed in the mid-1990s. An inability to turn a profit on the vehicle, however, soon convinced GM to pull its concept car off of the market. And while other companies (notably, Nissan) eventually revived the idea of the pure electric automobile, it was Tesla’s introduction of the Roadster in 2008 that finally took fire, and the subsequent introductions of the Model S, Model X, and Model 3 that popularized it.
Which brings us to today.
As carmakers around the world gear up to compete for market share in EVs, Tesla still retains its pole position as the most popular maker of electric cars around. They even occasionally turn a profit — twice in the past four quarters!
The question for investors, though, is whether Tesla can succeed in turning a profit consistently, and fending off competition from giant automakers the likes of Volkswagen, Ford, and GM, all of which are now attacking the electric market with a vengeance.
According to Exane BNP Paribas analyst Stuart Pearson, the answer to that question is “yes … probably.”
Pearson has put his action where his mouth is, initiating coverage on Tesla stock with an Outperform and $300 price target, which implies about 30% upside from current levels. (To watch Pearson’s track record, click here)
Arguing that Tesla has an “addressable market [of] a minimum of 10m units,” Pearson mused in a report yesterday as to how Tesla might “execute well [and] hit a cash sweet spot as rising margins meet working capital tailwinds.” With added cash from selling “CO2 credit sales to incumbent OEMs,” opined Pearson, “the holy grail of cash self-sufficiency may be closer than many think.”
Granted, Tesla’s rivals are massing to attack its market share. But Pearson believes that with competition still just gearing up, and EV sales growing at perhaps 30% annually, Tesla still has about a two-year window in which to “capitalise on a global EV market.” Currently, “no other EV travels further for each KWh of battery capacity — nor charges faster — than a Tesla,” argues Pearson. And with customers still plagued by range anxiety, this presents Tesla with the potential to triple its sales volume to as much as 1 million units per annum by 2025.
Already, says the analyst, Tesla is “on the brink of cash self-sufficiency,” margins are “recovering,” and perhaps enough so to deliver “a positive cash surprise” in the near future. Also helping will be “emission credit sales” (to other carmakers still selling mostly gas guzzlers) worth $800 million or more to Tesla annually. Add it all up, and Pearson sees a real possibility that as early as 2021, we could see Tesla generating positive free cash flow of $1.7 billion annually — up from negative $4 billion just two years ago. And with that prospect in the offing, and Tesla today costing only about $43.6 billion in market cap (25.6x estimated FY 2021 free cash flow), Pearson thinks it’s finally time to buy Tesla.
Granted, not everyone is enthusiastic about Tesla, as Pearson, as TipRanks analytics reveal TSLA as a Hold. Out of 26 analysts polled in the last 3 months, 7 are bullish on TSLA stock, 8 remain sidelined, while 11 are bearish on the stock. Worthy of note, the 12-month average price target stands at $250.73, which represents a 10% upside from where the stock is currently trading. (See TSLA’s price targets and analyst ratings on TipRanks)