We are reaffirming our BUY rating on Tesla Inc. (NGS: TSLA) and raising our price target to $777 from $566. Our revised target reflects our view that electric vehicles will account for an increasingly large portion of total auto sales, and that the cost of EV battery packs will continue to decline, making these vehicles more affordable for consumers. Looking ahead, we also expect continued revenue growth, lower operating expenses, and improvement in automotive gross margins. We currently expect full-year deliveries to approach management’s forecast of 500,000 vehicles, though deliveries could fall a bit short due to the pandemic. In our view, this would not be a significant issue.
In all, we look for Tesla to continue to benefit from its industry-leading technology (including control of its own battery cell supply chain); popular Model S, Model 3, Model X, Model Y vehicles; and forthcoming Cybertruck line. We also believe that Tesla is well positioned to expand in the Chinese market.
On December 8, 2020, Tesla announced that it would raise up to $5 billion by selling stock on the open market, rather than through a formal secondary offering. Tesla has hired 10 banks, including Goldman Sachs, Citigroup and Barclays, to help it sell the shares. The company split its stock 5-for-1 in late August to make ownership easier for smaller investors. The stock will be added to the S&P 500 index on December 21.
As discussed in our last note, on October 21, Tesla reported an adjusted 3Q20 net profit of $874 million or $0.76 per diluted share, up from $342 million or $0.37 per share in the prior-year quarter. Adjusted EPS far exceeded our estimate of $0.10 and the consensus of $0.55. (All per share amounts reflect the 5-for-1 stock split on August 31.)
The higher earnings were driven by increased deliveries (for the Model 3 and Model Y), higher Automotive gross margins, and higher auto leasing revenues.
Overall 3Q revenue rose 39% to $8.771 billion. Within that total, Automotive division revenue rose 43% to $7.346 billion. Services and Other revenue rose 6% to $581 million. The 3Q20 adjusted gross margin was 23.7%, up from 20.8% a year earlier, largely due to a higher average selling price (ASP) for the Model 3 Standard Range Plus.
In the third quarter, Tesla delivered 139,593 vehicles (15,275 Model S and Model X and 124,318 Model 3 and Model Y). Deliveries rose 44% from the prior year, due mostly to the reopening of the Fremont plant in California.
Energy Generation and Storage revenue rose to $558 million from $314 million a year earlier, an increase of 78%, reflecting increased deployments of Powerwall and Megapack products. (Megapack is a new energy storage product that combines up to 3 MWh of storage capacity and a 1.5 MW inverter). Tesla began Powerwall production in 3Q15 at its Fremont plant, but shifted production to the Gigafactory in Nevada in 4Q15.
EARNINGS & GROWTH ANALYSIS
Tesla has not provided fourth-quarter or full-year earnings guidance, though it continues to project 500,000 vehicle deliveries this year. At the same time, management has cautioned that the company could face additional operational disruptions due to the pandemic.
We are raising our 2020 EPS estimate to $2.34 from $2.19 based on our higher 4Q gross margin and revenue assumptions. We now expect revenue of $10.01 billion, up from a prior $9.680 billion. The current consensus EPS forecast is $2.23.
We are also raising our 2021 EPS estimate to $3.88 from $3.36, which assumes higher sales, slightly higher automotive gross margins, and a reduced impact from the pandemic next year. The 2021 consensus estimate is $3.86.
Tesla first gained attention with its 2008 introduction of the Tesla Roadster, the first fully electric sports car, at a price of $128,500. The company’s second vehicle, the Model S luxury sedan, began U.S. retail distribution in June 2012 at $95,400.
The company recently began to deliver its Model X sport utility vehicle. It had postponed the launch several times due to production issues, including engineering challenges related to the car’s upward-opening falcon-wing doors. The first deliveries of the Model 3, an all-electric car with a range of 200 miles per battery charge, were made to nonemployee customers in 1Q18. The Model 3 sells for approximately $35,000 before government incentives.
Tesla has completed construction of its battery production plant or ‘Gigafactory’ in Nevada, which management believes will reduce battery pack costs by more than 30%. The lower battery cost now allows Tesla to price its third-generation vehicles at about $35,000, well below the price of older models. The plant has been constructed in partnership with Panasonic Corp., which is supplying Tesla with specially designed lithium-ion fuel cells for electric vehicles.
FINANCIAL STRENGTH & DIVIDEND
At the end of 3Q20, total debt stood at $13.685 billion, down from $14.594 billion. The total debt/cap ratio was 43.8%, down from 66.1% a year earlier but well above the average for auto manufacturers. The company’s five-year average debt/cap ratio is 66.5%.
In 3Q20, cash flow from operations was $2.400 billion, up from $756 million in 3Q19. For all of 2019, cash flow from operations was $2.405 billion, up from $2.098 billion in 2018.
MANAGEMENT & RISKS
Tesla founder Elon Musk has served as the company’s CEO since 2008. He is also the CEO and chief designer of Space Exploration Technologies (SpaceX), and the nonexecutive chairman and principal shareholder of SolarCity, one of the leading providers of solar power systems in the U.S. Mr. Musk has overseen product development and design at Tesla from the start, and has had a nearly two-decade-long interest in electric vehicles (EVs) and other environmentally friendly technology.
Tesla is also at risk from higher costs for components and raw materials, as well as from manufacturing disruptions.
Tesla Inc. manufactures and sells electric vehicles, and energy generation and storage systems. The company was founded in 2003 and went public in June 2010. Tesla has approximately 49,000 employees and is headquartered in Palo Alto, California.
TSLA shares appear attractively valued at current split-adjusted prices near $604, in the upper half of their 52-week trading range of $70.10-$654.32. They are trading at a lofty 258-times our 2020 EPS forecast and 156-times our 2021 forecast, compared to an eight-year average annual range of 61-170.
Despite the stock’s strong recent run-up and high P/E multiples, we see further upside based on the company’s increased production, improving gross margins, and sustained demand for Tesla vehicles. Our rating remains BUY with a revised target price of $777.
On December 10 at midday, BUY-rated TSLA traded at $613.79, up $9.31.