Baird Brushes Off Model X Concerns In Tesla Upgrade, Sees High Short Interest As Catalyst For Upside

Baird brushed off its Model X concerns while upgrading Tesla Motors Inc TSLA to Outperform and raising its price target to $300 from $230.

"We believe investor skepticism has significantly increased since we downgraded TSLA on Oct. 6, and although we were concerned about the rate of Model X deliveries, recent data points show production is accelerating, which should drive deliveries and margin expansion throughout 2016," analyst Ben Kallo wrote in a note to clients.

"Model X concerns are similar to the Model S introduction [...] Concerns about the Model X production ramp remain high, although we believe negative sentiment has become overblown, and are confident in TSLA's ability to ramp production and margin. Bears argued the Model S could not be economically produced, although Q$:15 non-GAAP automotive gross margin reached 25 percent (excluding non-recurring charges)," according to Kallo.

Related Link: Tesla Analyst Calls Model X Test Drive "Incredible"

"We recently visited the factory and viewed dozens of Model Xs in production. We believe TSLA's manufacturing skills, ability to lower input costs and constant efficiency initiatives will allow the company to reach its 25%+ Model X gross margin target over time," Kallo noted.

In addition, Baird noted Tesla's indication that access to the equity markets for the current year are not necessary "given its ABL and access to bridge financing, although TSLA could raise capital opportunistically."

Additionally, the report highlighted potential catalysts for a Model III introduction based on high short interest. "Short interest remains elevated (~34.7 percent of the float), and has increased ~649 bps since December."

"We believe negative sentiment is at a multi-year high," Kallo said.

While it's still uncertain if the launch event will become a positive catalyst, it is expected that Tesla "will reveal its initial reservations received."

"Importantly, we think initial reservations will exceed expectations, which should be positive for shares," according to the report.

Shares of Tesla closed Friday's regular trading session at $207.50, and have been down 13.55 percent year-to-date.