Tesla stock moved higher today after Goldman Sachs analysts said they see potential upside of 22% to the shares. Much of Wall Street has been concerned about the manufacturing problems and delays, which caused the automaker to miss its delivery target for the first quarter. These concerns were ratcheted up a notch when Tesla CEO Elon Musk announced that they had moved up their already-ambitious target of producing 500,000 vehicles annually by two years to 2018.
As a result of all these concerns, Tesla stock has pulled back dramatically since the company’s last earnings report, and this is why Goldman analyst Patrick Archambault and team believe an upgrade is warranted.
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Tesla stock upgraded to Buy
In a report dated May 18, the Goldman team said they upgraded Tesla stock from Neutral to Buy but maintained their six-month $250 per share price target. They agree with most of Wall Street that the new volume targets are extremely ambitious, but they also believe that expectations have been reset and now appear “more grounded” since the 23% decline that has come since the Model 3 was unveiled.
As a result, they don’t believe Tesla stock fully captures the automaker’s “disruptive potential.” Further, they said the macro backdrop is stabilizing compared to where it was in January and February, and their confidence in demand for the Model 3 has increased, not only due to the explosion in preorders the automaker has received but also from their own “competitive benchmarking.”
The Goldman team notes that Tesla management has already said they might carry out a capital raise to support the accelerated timeline for mass market volume production, and their work suggests that the company might need $1 billion.
Few visible catalysts for Tesla stock
However, they also note that they now see fewer catalysts than there were previously because the next major update on the Model 3 might not come until sometime next year. One catalyst they do see as a possibility is the unveiling of a mobility service, which has been the focus of speculations for quite some time. They add though that it’s unclear when such a service might be unveiled because management hasn’t said much about it.
Archambault and team believe the next major catalyst in the near term will be the ramp of production for the Model X. They report that progress on this front seems to have been limited since Tesla released its first quarter update, based on “the cadence” of deliveries in April and May. However, they also believe expectations are low because the company has been missing delivery targets.
Further, they believe both the sell-side and buy-side expect Tesla to reduce its current target of 80,000 to 90,000 deliveries this year. The automaker has been known to cut its delivery targets before, so if this does happen, it shouldn’t be much of a shock. As a result, the Goldman team sees this risk as already being discounted in shares of Tesla stock, so they believe any positive news on the production ramp for the Model X “would strongly support the shares.”
Tesla stock climbed by more than 4% to as high as $215.02 per share during regular trading hours on Wednesday.