Tesla Shares Still Have 'Significant' Upside; Argus Reiterates $333 Price Target

Argus sees significant further upside in the shares of Tesla Motors Inc TSLA given the "outlook for improved operational and financial performance, including rapidly accelerating earnings in 2017."

"Although Tesla has faced production shortfalls and cost overruns over the past 18 months, we believe that it has made progress in addressing these issues and that it is poised for much stronger performance in the coming quarters," analyst Bill Selesky wrote in a note.

The company is on track with production of the Model 3, with first deliveries expected in late 2017. It also plans to deliver 500,000 total units (Model S, Model X, and Model 3) in 2018, two years earlier than its previous forecast.

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Selesky noted that though the shares appear expensive on P/E basis, the valuation is justified by Tesla's strong growth prospects and innovative vehicle and battery technology.

Tesla reaffirmed its 2016 outlook, which calls for full-year production of 80,000-90,000 Model S and Model X vehicles, with about 20,000 in the second quarter. The company expects the average vehicle price to increase slightly this year, as the more expensive Model X becomes a larger part of the mix. It also looks for a stronger gross margin in 2016, driven by greater manufacturing efficiencies.

The analyst cut his 2016 non-GAAP EPS estimate to $0.69 from $1.25 on higher costs and remains slightly above the 2016 consensus forecast of $0.67. Selesky also trimmed his 2017 EPS view to $3.07 from $3.21 versus consensus estimate of $2.60.

"Looking ahead, we expect Tesla to meet or exceed its production targets and to achieve positive cash flow in FY16. We also look for a significant acceleration in non-GAAP earnings in 2017," Selesky added.

Selesky reiterated his Buy rating and $333 price target on the stock, which recently traded at $222.65.

Tesla shares have underperformed thus far in 2016, falling 6.2 percent while the S&P 500 Consumer Discretionary index has increased 0.9 percent.p