Tesla Inc TSLA shares have tacked on solid gains for the year-to-date period, reflecting an improvement in fundamentals. On Monday, an analyst at Jefferies bumped up the price target for Tesla shares to the highest on the Street.
The Tesla Analyst: Philippe Houchois maintained a Buy rating on Tesla shares and increased the price target from $950 to $1,400.
The Tesla Thesis: Tesla's last two quarterly results impressed on all metrics, with the company leveraging R&D and selling, general and administrative expenses, analyst Houchois said in the note.
Adjusted for zero-emission vehicle credit and CEO special compensation, third-quarter GAAP margin reached 14.2%, mainly from hardware, the analyst said, citing CFO Kirkhorn. A gross margin of 28.8% validates hopes of a more profitable electric vehicle world ahead, he added.
The margin gap with the rest of the industry is due to competitive battery/powertrain cost, streamlined manufacturing, margin retention from direct selling, and a modest contribution from software revenue although modest, the analyst noted.
"OEMs are responding slowly and only one or two challenges at a time," the analyst said.
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Not counting out executive risk, Tesla is getting to a position where it can balance affordability and speed — goals which are as important as profitability in Elon Musk's vision, Houchois said.
As the model range and price points move away from Bayerische Motoren Werke ADR BMWYY or Daimler AG DDAIF-owned Mercedes towards mid-market with a yet to be confirmed Model 2, Tesla looks set to gain share from large OEMs, the analyst said. The EV maker can potentially claim a disproportionate share of the industry profit pool in the coming three to five years as legacies enter the margin dilutive EV transition phase, he added.
Volkswagen AG VWAGY or General Motors Company GM may soon sell more EVs than Tesla but "de-growth" in ICE accelerates loss of scale, Houchois said. Tesla, meanwhile, demonstrated an EV OEM can scale up at lower volume, he said.
"With an acceleration of self-funded growth in Q3 and un-heard-of returns at a brand price point moving towards volume segments, Tesla looks more scaled up today than most OEMs and in position to turn the Legacy zero-sum-game into a negative one," Jefferies said.
The firm raised its estimates by 16% across profit and loss statement items and free cash flow.
TSLA Price Action: Tesla shares were down 3.11% at $1,184.11 Monday morning at publication.
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