Tesla stock is climbing in the wake of a price target increase from analysts at Deutsche Bank. They believe it’s possible for the company to reach breakeven by the fourth quarter of this year and then turn a profit in 2018 as the Model 3 ramps.
Adding in Tesla’s guidance
In a research note dated March 14, analyst Rod Lache said he bumped up his price target for Tesla stock from $215 to $220 per share and maintained his Hold rating on it. His new price target and estimates for the company come from his updated model, which incorporates management’s guidance. They expect to deliver between 45,000 and 50,000 vehicles in the first half of this year and project gross margins that are on level with what the company recorded in the third quarter, which was 25%, excluding zero emission vehicle credits.
Tesla also expects to spend between $2 billion and $2.5 billion on capital expenditures leading up to the Model 3 launch.
Capital raise expected
Lache now expects the company’s cash to fall to $1.1 billion by the third quarter and $600 million by the end of the year, although he hasn’t yet added a capital raise into his model. Pretty much everyone expects Tesla to announce a capital raise before the Model 3 launch because of how much it will cost to get production lines up and running and complete work on the Gigafactory. What has been up for debate is the timing and amount of that capital raise.
Lache feels that the size and type of the capital raise will indicate just how confident the EV maker is in the launch of its mass market vehicle later this year. Management expects to become cash flow positive after volumes have ramped. He said a smaller raise might demonstrate that they’re confident in the launch but leave investors with “less room for comfort.”
When will Tesla’s capital raise come?
Tesla stock has been falling steadily since the middle of February, and the share price will likely impact the type of raise management chooses. Seeking Alpha contributor Bill Maurer doesn’t think the EV maker would announce a capital raise after such a big fall in its stock price, and he suggests that its first quarter results “may not be that bad.”
The automaker had more than 6,000 vehicles still in transit at the end of the fourth quarter, so those vehicles will be added to its first quarter delivery tally. Maurer adds that this was the company’s largest quarterly end so far. He also notes that a gross margin rebound can be expected as Tesla starts recognizing Autopilot 2.0 revenue.
He feels that the company will probably wait until its first quarter earnings report to announce a capital raise in hopes that investors will push its stock higher as the Model 3 launch nears.
Growing investor confidence in Tesla stock
Lache sees a number of things the company will need to do in order to boost investors’ confidence, just one of which will be execution of the Model 3 launch, including timing, speed of the ramp, cost, quality and gross margins. The company’s ability to start “generating cash on a sustainable basis” is also important, and he feels investors will be looking at the Model 3‘s impact on demand for the ore expensive Model S and Model X. And finally, he feels Tesla must become more willing to offer greater clarity into its plan, especially long-term plans on capital and operating expenditures and cash needs.
Shares of Tesla stock rose by as much as 3.94% to $255.88 following Deutsche Bank’s target price increase.