Maintain 3Q TSLA Estimates; Trim 2015 on Higher Costs
We continue to forecast 3Q deliveries of 7,800 units; maintain 3Q
estimates and price target. We maintain our 3Q forecast for deliveries of
7,800 units, which mirrors company issued guidance for deliveries of
"about 7,800 Model S vehicles". Embedded in our deliveries estimate is a
3Q production forecast of 9,000 units, only marginally higher than the
8,763 units manufactured in 2Q as a result of a stepped up exit run-rate
that was nevertheless muted by a temporary shutdown of the Freemont
facility for an intra-quarter retooling which allowed said step-up. Trim
2015 estimates on higher costs, largely maintain out-year estimates. We
largely maintain our out-year earnings estimates for 2016-2020 and
maintain our $190 December 2015 price target. We trim only our 2015
estimates, on an increase in R&D and SG&A expenses occurring earlier than
previously assumed, bringing us closer to consensus.
Investment Thesis, Valuation and Risks
Tesla Motors (Neutral; Price Target: $190.00)
Investment Thesis
Our Neutral rating balances notable investment positives, including a
highly differentiated business model, appealing product portfolio, and
leading-edge technology, with above-average execution risk and valuation
that seems to be pricing in a lot. Tesla is attractively saddled with none
of the pension, OPEB, and other legacy costs which frequently burden large
entrenched automakers. Its products are bold, distinctive, elegant, and
highly entertaining to drive. The company is led by visionary leadership,
backed by a management team with solid functional strength. Although both
technology and execution risk seem substantially less than was once
feared, expansion into higher-volume segments with lower price points
seems fraught with greater risk relative to demand, execution, and
competition. Meanwhile, valuation appears to be pricing in upside related
to expansion into mass-market segments well beyond our volume forecasts
for the Model III.
Valuation
We maintain our Neutral rating and maintain our December 2015 price target
of $190 using a blend of a multiple-based analysis and a discounted cash
flow based valuation. We value TSLA shares using a 50/50 blend of a
multiple-based analysis on our 2020E revenues, EBITDA and EPS forecasts,
and a discounted cash flow method of valuation.
Risks to Rating and Price Target
Upside risks include: (1) Long-term demand for electric vehicles in
general - especially in more price conscious volume segments - remains a
key unknown, representing both an upside and downside risk; (2) Demand for
Tesla vehicles could rise materially as awareness builds; (3) Gasoline
prices could increase which could drive adoption towards electric vehicles.
Downside risks include: (1) TSLA is subject to volatile commodity markets
particularly aluminum, steel, nickel and copper; (2) Demand for the Model
S could decline after early adopters receive their vehicles; (3) Execution
risks seem high; (4) Demand, execution, and competitive risks seem
especially high for a next-generation mass-market electric vehicle; (5)
Tesla competes against entrenched automakers with significantly greater
scale, brand recognition, and access to financial resources.
