Video Bar


Friday, April 1, 2016

Tesla Model 3 Launch Makes TSLA Stock Cheap

featured story

Make no mistake, Tesla Model 3 that was launched is, if you’ll forgive the cliché, a game changer. The car itself, a more moderately priced, mass market version of Tesla’s electric vehicles is, by all accounts impressive, but what is truly revolutionary is not the car, but the public reaction to its availability.

During the presentation, Tesla indicated that orders hit 135,000, and shortly afterwards they indicated that the 150,000 order mark had been surpassed.
That far exceeded most people’s expectations.
I will freely admit that the last time I wrote about TSLA here, it was to talk about selling the stock. I made it pretty clear in that piece that this was a trading move rather than an investment and was based on the fact that I had recommended a buy back in February when the stock was around $150.
A bounce back off of $240 looked likely and taking some profit with a view to buying back later looked like a decent trade. I stand by that as TSLA did drop over 10 percent in the next few days, but if you did that and didn’t yet buy back, doing so now would be smart.
Of course, as I made clear back then, those with a longer term, investment view, should just hang on to the stock. A 10 percent correction may be a good opportunity for those with a trader’s mindset to improve their average cost basis, but in the grand scheme of things it is not that significant; over 150,000 orders for the Model 3 in the first day, however, is.
As impressive as that number is though, it would mean nothing if those cars were produced at a loss. That, however, looks unlikely. The key to the new, affordable Tesla is the falling cost of batteries, a trend that should be accelerated when the company’s Gigafactory gets up to speed. As it is, management have indicated that battery pack costs are currently running at around $200 per KWh, down a third from when the Model S was launched. When the Gigafactory is at full production, they estimate that costs could be reduced by another third. Even without that, though, margins based on current battery cost should be decent.
The Tesla skeptics, a fairly common breed, will no doubt point out that part of the problem so far has been that management predictions in most things have been overly optimistic - why should this time be any different? From an investor’s perspective, though, the fact is that optimistic forecasts from management are now routinely priced into TSLA.
Most Wall Street analysts have, until now, based their forecasts on significantly lower numbers than Tesla’s estimate of 500,000 vehicles delivered annually by 2020. Demand at these levels indicates that that number may not be overly ambitious after all. If anything the problem going forward could be production capacity.
As always, there are risks. There is always the chance of glitches or even major problems emerging after a new model’s release, but Tesla’s quality control record thus far has been excellent and the ability to remedy minor issues with a software download makes that less of a risk in this case. Also, if momentum is to be maintained, the charging network, and the number of Superchargers especially, will have to expand quickly. Tesla has plans to double the number of Superchargers by the end of next year, but continued rapid expansion could be a challenge.
All in all, though, the risks look manageable and the future for TSLA looks bright. The shift from an ultra-luxury “novelty” brand to a mass producer has taken longer than many people, including Tesla’s management, hoped and suggested it would.  Now though, with rapidly falling battery costs and what looks like spectacular demand it is underway, and that fundamental transition makes the stock look cheap regardless of current multiples.

No comments: