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Morgan Stanley puts out another note with full details on how they arrived at the current price target of $242
Tesla’s Mission 2017: Funding the Model 3
Stock Rating: Equal-weight
Industry View: Cautious
Price Target: $242.00
We see the 2 key drivers for Tesla’s stock price in 2017 as: (1) Model 3 pre-launch/launch milestones and (2) and how the company accesses capital to fund the plan. Success on the latter directly impacts the former. The equity outcomes may be highly volatile.
In our view, the Model 3 is a potential funding strategy for Tesla’s bigger mission to accelerate the development of a highly safe and efficient transport utility. However, 2017 is all about the later stages of development (and the possible commercial launch) of the Model 3. The acquisition of SolarCity was, in hindsight, an unavoidable pursuit and we have, for now, ascribed zero value to Tesla shareholders. The Gigafactory will be critical to controlling the reliability of the battery supply, the most value-added component of Tesla's vehicles, but by itself we do not see it as a material mover of the stock next year. 2017 is the year of the Model 3. What’s the content? Where are the prototypes? When do we get to drive it? Will we want one? Is it as good (or better) than the Model S for less than 1⁄2 the price? When does it launch? We may not get the answers to all of these questions in 2017, but we’ll have to get some. And each one matters.
Key thoughts on upcoming catalysts for the stock:
1. We expect 4Q results to broadly resemble 3Q in many ways. We are anticipating strong growth and potentially positive cash flow from operations (before capex) to be accompanied by great investor uncertainty around the quality and sustainability of the performance.
2. We do not expect the Model 3 to be launched in 2017. While we cannot rule it out, we do not adopt as our base case a scenario in which Model 3 deliveries begin in 2017. We recognize that Tesla management has targeted a 2H launch date and that they will make every effort to satisfy high levels of preliminary demand and fill orders for the product as soon as possible. However, our base case is for a launch in late 2018. We have taken this conservative approach to allow for the probability that Tesla will choose to prioritize the quality, cost, performance and lifesaving technology of the vehicle. While Tesla still adopts a high level of vertical integration, we expect the Model 3 to rely even more extensively on 3rd party suppliers than the Model S, potentially increasing the scope of supply-related factors outside of the company’s control.
3. Prior to a launch, we anticipate Tesla should be in a position to reveal further important technical details about the Model 3 and its capabilities as part of an effort to help bolster the financial capital at its disposal to execute as flawless and as on-time a launch as it possibly can. Tesla has a well-established precedent of communicating important product information to the public in a highly visible way.
4. Safety and sheer human driving pleasure are the two key attributes (in that order) that we expect Tesla to showcase with the Model 3, regardless of when it is launched. Elon Musk stated on the 3Q call that it did not need to raise capital (but he did not categorically rule it out). We have not modeled in a capital raise, but gross cash in our earnings model does dip below $1bn by the end of 2018. We only point out that the Model 3 is so important to this company’s future on multiple levels that they really have to get it right. One could reasonably expect Tesla to emphasize to the investment community the opportunity it has to accelerate the launch of what could be the world’s safest automobile and one that represents a potential step-change in real-world machine learning (and the subsequent social and economic benefits). We see 'teasing' the Model 3 launch as going hand and hand with efficiently funding the strategy. These two 2017 drivers appear to be inextricably linked.
The future of this industry is about miles, data, people (e.g., software engineers) ... and capital. We estimate Tesla's global fleet drives approximately 5 million miles per day with around 1/3 of these miles on autopilot. We also estimate the pace of daily miles traveled to double in just over 1 year. This puts Tesla in a unique position to push state of the art algorithmic driving and machine learning in personal transport... key pillars of accident-free driving. Analysis of aggregated Tesla driving data that reveals statistically significant positive safety outcomes could have a potentially powerful impact on perceptions of regulators, consumers and investors. We encounter validation of Tesla’s technology, processes and people throughout the auto and tech industries. Uncertainty around funding the plan (the right side of the balance sheet) at a time of great cash consumption keeps us EW.