Tesla Motors remains one of the most polarizing stocks on Wall Street, just as it has for years. Today the EV manufacturer racked up another positive report, getting a big thumbs-up from Jefferies analysts Dan Dolev and Trevor Young.

Tesla Motors Inc Shares Rise After Jefferies Initiation [In-Depth]

They initiated coverage of Tesla with a Buy rating and $350 per share price target this morning, which may be why shares climbed in premarket trading. The Jefferies analysts see further upside potential of up to $450 per share and downside potential of $150 per share.

Shares of Tesla opened 3.2% higher at $237.76 per share this morning after Jefferies’ report.

Tesla in China? No problem

One thing Tesla has been struggling with is weak sales in China. The automaker said many of the people who have ordered Model S sedans in China did not pick them up, leaving it with a significant amount of inventory there. The Jefferies team thinks worries about China are overblown.

The reason they’re not worried about China is because their proprietary survey suggests demand for Tesla’s cars is so strong that even without China, the automaker could sell half a million cars or more just in North America and western Europe by 2020.

Jefferies survey supports Tesla’s comments

Tesla CEO Elon Musk has said in the past that they don’t need China to meet their sales targets, so Jefferies’ survey would seem to back this up. The analysts said 68% of the respondents to their survey are considering vehicles that use alternative fuels, and 7% of them are specifically considering buying a Tesla. And on the topic of the rumored Apple car and Google’s self-driving car, they report that there appears to be “little excitement” about them. (All graphs in this article are courtesy Jefferies.)

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Further, they say that these numbers still suggest Tesla will grab less than 0.5% of the global light vehicle sales in 2020. They say their revenue model indicates that “with reasonable” assumptions for average selling prices and volume, Tesla can increase its revenue at a compound annual growth rate over five years of between 35% and 40%.

The Jefferies team also did a comparison with Tesla’s peers and said that when looking at similar models and vehicle types, they get a five-year compound annual growth rate of 60% for EBITDA. That’s a gross margin of between 32% and 33% by 2020, compared to the current gross margin of 27% to 30%.

Tesla’s battery a real asset

As many other analysts have noted in the past, Tesla’s proprietary battery technology places it years ahead of competitors, especially as it continues to focus on advancing that tech. Tesla’s Model S has a range that’s about three times the typical electric vehicle. Further, the company continues to focus on bringing down battery costs and should make great strides in this area once its gigafactory is up and running. The Jefferies team estimates that the facility should enable Tesla to slash its cost per kWh by about 30%.

Also the automaker announced its stationary energy storage systems last week, demonstrating how it is using its battery technology to create a new stream of revenue.

In-depth on Jefferies’ survey

Slashing battery costs is an important factor in whether Tesla will be successful, as demonstrated by Jefferies’ survey. The analysts report that just 42% of those who participated and are interested in buying a Tesla would pay over $40,000.

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This indicates that the automaker will only make it into the mass market by successfully releasing the Model 3, which is expected to be priced below $40,000. Clearly $40,000 is the pain point for consumers, which means the success of the Model 3 hinges on the price point. If the price is higher than $40,000, the Model 3 might still be a success, although it won’t be as much of a success as it would be if priced below that level.

But even at 42%, the analysts note that the Model 3 could still boost Tesla’s unit sales up over 500,000 cars by 2020 because they are not including China sales.

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They add that the Model X should help double Tesla’s addressable market, as the Model S currently addresses only about 18% of the midsize premium market.

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The Jefferies team estimates that the Model 3 will increase the automaker’s addressable market by almost four times.

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Why Tesla can reach 500,000 cars/year

Further, they say reaching 500,000 cars per year is possible for Tesla and perhaps even conservative because battery electric vehicles are beginning to gain share in the alternative fuel category.

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The Jefferies team also notes that while lower gas prices may affect the category to some extent, their survey suggests potential buyers of Tesla’s cars aren’t thinking about gas prices. Instead, they’re more interested in performance and being environmentally friendly, even though the automaker has estimated that charging its cars costs about 25% less than it does to gas up comparable vehicles.

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Other reasons they give for Tesla being able to hit its 500,000 vehicle per year goal by 2020 include management’s historic execution and analysis of the company’s peers. These factors suggest the expected ramp of 50% to 60% compound annual growth rate in production through 2020 is possible.

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