Tesla Motors Inc (NASDAQ:TSLA) announced last week that it is upgrading the warranty on the drive train for its Model S. As a result, Deutsche Bank analyst Rod Lache trimmed his estimates slightly. However, it isn’t all bad news, according to Lache, who thinks that improving quality probably means a decline in warranty accruals per unit throughout next year in spite of the upgrade in the warranty.
What will the warranty upgrade cost Tesla?
Lache maintains his Buy rating and $310 per share price target on Tesla Motors and said he would buy shares if any weakness appears in them. He estimates that the upgraded warranty will cost the automaker approximately $7.9 million. That new warranty covers all Model S cars, even those that have already been produced.
Tesla will now cover the drive trains of the Model S for eight years and unlimited miles during those years. That makes the drive train warranty match that of the battery pack. It’s also quite an upgrade from the previous warranty, which was for 50,000 miles and four years.
According to Lache, the upgrade could be a response to the updated reviews from Consumer Reports and Edmunds, both of which said they were rethinking their very positive reviews of the Model S based on new issues with the drive train that popped up. He thinks the warranty could cause Tesla to recall all of its 39,000 cars and shell out $200 per vehicle to handle the drive train issues.
Why buy Tesla at current levels?
While Lache rates Tesla as a Buy, many analysts warn that the automaker’s fundamentals aren’t yet at a level that can support the current stock price. However, InvestorPlace editor Jeff Reeves still thinks Tesla Motors is worth buying, despite the high share price.
For one thing, he notes that the automaker has approximately $2.7 billion in cash and equivalents plus $5 billion in total assets. He says this shows just how stable the company’s balance sheet is even though it’s running close to breakeven.
Reeves also says Tesla shouldn’t be priced as an automaker because the company’s business model is so different than that of Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM) and other traditional automakers.
Wall Street remains mesmerized by Tesla
He also notes that the company is in the process of building a massive gigafactory that will enable it to join the mass auto market. In addition, Wall Street is always obsessed with growth, and he says this certainly isn’t the only high growth stock that has taken off beyond where the fundamentals would otherwise carry it. He notes that not all companies are able to grow earnings so fast and so consistently, which is why investors are paying such a high premium for its stock.
And then there’s the fact that short interest in Tesla has declined from about 31.6 million at the beginning of the year to about 24.1 million thanks to short squeezes. Because of all these things, Reeves sees another 60 days of upward movement for Tesla as investors look forward to more news about targets and production capacity.
