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Shubham Jaipuria
Shubham Jaipuria
Articles (18) 

What Lies Ahead for Tesla?

The company is trying to recover after a rough few weeks, with analysts producing bullish notes on the stock

September 10, 2018 | About:

Tesla Inc. (NASDAQ:TSLA) has been going through a rough patch as several controversies have impacted the stock recently.

After announcing he was taking the company private without securing funding last month, CEO Elon Musk came under more fire last week after he appeared to be smoking marijuana on live television, which resulted in the stock being hammered. Adding to the agony, shares also bore the brunt of Chief Accounting Officer Dave Morton's departure a month after stepping into the role. Regardless of these setbacks, however, fundamentals still indicate Tesla is a long-term value play. 

Despite all the negative news, multiple analysts agree Tesla is a long-term buy. The steep decline in share price, around 26% in the last month alone, has led investors to believe that the timing is right to enter the stock. Moreover, further validation from the Street’s top analysts added to the optimism. For instance, Baird analysts reiterated their buy rating and $411 price target on the stock after visiting Tesla’s Fremont factory.

While investors were worried about Model 3 production targets, issues finally seem to be getting resolved. Should production get back on track, its mass-market reach and value will add to the company’s top line. Moreover, with the electric vehicle space gaining traction, Tesla seems to have great potential.

Adding to the joy, Musk’s tweet last week that Tesla’s Model 3, S and X were the top three selling electric vehicles in the U.S. in August supported the bull case. According to InsideEVs, Tesla sold 17,800 Model 3s, 2,750 Model Xs and 2,625 Model Ss during the month. Even though electric vehicles account for just 1% of the global automobile market, if Tesla is able to dominate that small fragment, it will prevail.

While there is competition, Tesla seems to stand out in the space as electric vehicles aren’t the primary focus of its so-called rivals. Although General Motors (NYSE:GM) has way better fundamentals and sales figures than Tesla, its best-selling electric vehicle shipped 30% fewer cars than the Model X.

What is yet to be seen is how Tesla will handle concerns regarding the trade war between the U.S. and China. Ramping up production and finding a way around tariffs  is essential for Tesla to survive as China presents a great growth opportunity to the players in this space, given the increasing preference to shift to alternative energy-powered vehicles. Per a government filing, Tesla derived nearly 17% of its revenues from the emerging market last year.

Moreover, earlier this year, Tesla announced plans to launch a factory in Shanghai in the next two years, which will increase the company’s production capacity to 1 million cars a year. The proposed Shanghai factory will not only eliminate the tariff component, but will also lead to savings in terms of shipping, labor and component costs.

All told, while Tesla has a massive backlog of orders to fill, it seems to be on the right track to achieve its targets, barring a few managerial concerns. Improving margins for the company, its product pipeline and factory expansion plans are expected to play in its favor.

While valuations might seem a tad stretched compared to industry averages, the stock is fairly attractive given the recent decline in price. Moreover, considering the backlog Tesla has in its books, demand does not seem to be an issue. 

Disclosure: I do not own any of the stocks mentioned above.


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