Craig Irwin and Min Xu of Wedbush discuss their thoughts on Tesla Motors Inc (NASDAQ:TSLA) in a recent note to clients. Below is the executive summary.

Tesla Motors TSLA

Tesla Motors Inc (NASDAQ:TSLA)

We hosted investor meetings with management from Tesla and came away with further confidence in our constructive thesis.

  • Tesla’s 4Q13 deliveries upside of around 1,000 units versus our prior estimate was driven primarily by increased battery availability from Panasonic, as well as a material improvement in direct-run vehicles. Vehicle ASPs may have seen sequential support from the mix possibly leaning towards more heavily optioned vehicles, where Tesla could even have seen Q/Q strength. We believe Panasonic is likely prioritizing deliveries to Tesla over other customers now that Tesla is the world’s largest customer for lithium ion batteries. Direct-run vehicles, or cars that have zero rework or defects through the entire manufacturing process, are likely reaching best achievable levels and impressive efficiencies.
  • We believe the recent constraints that Panasonic’s available production capacity have presented are likely to be resolved by 2H14 when shuttered capacity is likely to be re-commissioned to produce batteries for Tesla. The cost-out roadmap of a mid- to high-single-digit percent reduction in annual battery costs should support a continued tailwind for 2014 Model S gross margins.
  • The 1Q14 outlook should reflect the number of units in transit to China, which we believe is one of Tesla’s most exciting target markets.
  • We see increasing potential Tesla could add another Model S production line in 2014 to serve what the company describes as robust demand.
  • On the 4Q13 call, we expect Tesla to give additional details on its plan for a battery giga-factory, which Tesla likely will build in a partnership agreement.
  • We reiterate our OUTPERFORM rating and $205 price target. Our target is based on 30.0x 2017E EPS of $10.00, discounting back four years using a 10.0% discount rate. We believe valuation based on 2017 estimates is appropriate as that is the first year Gen-III volumes are expected to scale, and view a 30.0x EPS multiple as fair since Tesla Motors Inc (NASDAQ:TSLA) should still be doubling earnings at that point.
  • We see strong positives in Tesla Motors Inc (NASDAQ:TSLA)’s credible path to longer-term battery cost reduction and the Gen-III vehicle target costs, and what we believe will be a receptive buying public willing to purchase EV’s while retaining reasonable expectations for these vehicles. Tesla’s multi-year lead over credible competition suggests the company is well positioned to deliver an aggressive volume ramp.

 

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