Tesla Stock Predictions: Greater Efficiency Is Compelling Reason To Go Long On Tesla

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary

  • I reiterate my March 3 buy recommendation for Tesla. In spite of -12% YoY lower Q3 revenue, the stock is again trading above $326.
  • Investors like it that greater efficiency is helping Tesla become more profitable. Reduced manufacturing and material costs makes Tesla a better long-term investment.
  • Tesla is now generating most of its sales from its cheapest car model, the Model 3. It still managed to deliver a better-than-expected Q3 GAAP net profit of $143 million.
  • Tesla manufactured and delivered almost 80k Tesla 3 models in Q3 2019. Tesla’s future prosperity is now insured – Tesla is now a legitimate consumer car vendor.
  • Another tailwind is Tesla 3rd generation Solar Roof. Tesla is now poised to become the world’s best installer of solar power roofing.

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Tesla Stock Forecast: Why The Expansion To India Will Boost TSLA

Summary:

  • Tesla reported Q3, the first profitable quarter in two years
  • Elon Musk confirms that Tesla is going to enter the Indian market by 2019
  • I Know First has bullish forecast for TSLA on a 1-year perspective

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Tesla Stock Forecast: Bringing Electric Vehicles To The Masses

 

This article was written by Julia Masch, a Financial Analyst at I Know First.

Tesla Stock Forecast

Automakers must “keep iterating and improving and make better and better electric cars, and that’s what going to result in humanity achieving a sustainable transport future. I wish it was growing faster than it is.” – Elon Musk, Chief Executive Officer of Tesla

(Source: Pixabay)

Highlights

  • Mass Production Of The Model 3
  • Potential Problems & What’s In The Pipeline
  • Current I Know First Bullish Forecast For TSLA

Tesla is trying to bring the world into a more sustainable future through the popularization of electric cars. The company has been producing luxury electric vehicles for a decent amount of time and is now attempting to make a car for the masses: the $35,000 base Model 3. Year to date, Tesla stock has increased by about 10%.

Mass Production of the Model 3

However, the electric car company is yet to post a profit as it has consistently burned through cash for R&D and production. The future of Tesla is highly dependent on the production of the Model 3 because the company does not expect an increase in Model S and Model X deliveries this year, but has high expectations for its less luxurious car: the Model 3. Ideally, mass production of the Model 3 will allow economies of scale to present themselves and increase the gross margin on the car, thus increasing the company’s total gross margin. Over the past year, Tesla’s GAAP Gross Margin has decreased as it began ramping up production for its newest model.

But the question remained, could Tesla keep up with the massive demand for the Model 3 and when would they finally turn a profit?

Elon Musk has been making promises about Model 3 production since its inception, often shooting for goals that are not realistic. Musk told investors to expect Model 3 production to increase to 2,500 cars a week by the end of Q1 2018, yet he missed this target. So when Musk told the world Tesla planned on producing 5,000 Model 3s a week by the end of Q2 2018, more than double the prior quarter’s missed target, analysts were skeptical.  

(Source: Bloomberg Model 3 tracker)

Bloomberg even created a Tesla Tracker to monitor the production of Model 3 cars by monitoring VIN data (a VIN must be registered for every car produced). Goldman Sachs analysts were bearish about Tesla’s production in later June with the end of quarter soon approaching. This prompted Musk to send out a company wide email saying that these analysts were in for a “rude awakening” and Tesla was still “quite likely” hit their production target.

Manufacturing The Model 3

Tesla finally released its Q2 2018 Vehicle Production Deliveries Report on Monday July 2, 2018 announcing that by working through the wee hours of the night the company had produced 5,000 Model 3s in one week. At first, the stock rallied following the announcement, but by the end of the day on Monday stocks slumped by 2.3% as investors questioned if the production rate was sustainable. If the company can continue to produce at this rate, the company will be able to produce over 45,000 cars in Q3 which should push them to profitability for the first time, in line with Musk’s expectations of positive GAAP net income for Q3 and Q4 this year. These expected profits even consider negative impacts from a weaker dollar and the potential impending trade war.

(Source: Yahoo Finance)

At current production costs (and excluding future economies of scale), for the automotive segment, operating expenses, and interest expenses to break even,Tesla must produce 5,575 Model 3 cars each week. To break even on all expenses, the company could also produce 8,974 Model 3s. However, this is based only on Model 3 sales, and Model S and Model X production in combination with lower expenses make profitability a possibility for the upcoming quarters.

Reaching the target goal of 5,000 Model 3s a week for Tesla was not easy. In order to nearly triple the production rate, the company used any means possible including setting up a new General Assembly line housed in tents outside Tesla’s Fremont factory and having employees work long hours and weekends. This new GA4 line accounted for almost 20% of the cars produced in the quarter’s final week and was a key component to hitting the goal. Musk claims that the company’s regular GA3 lines will be enough to sustain the 5,000 cars per week and the GA4 line will only help the company exceed expectations. Musk says he aims for 6,000 cars produced each week by the end of next month. Yet, some employees believe the production line is already overextended and the high Model 3 production rate will detract from the fulfillment of orders of Model S and Model X cars. Musk himself was extremely involved in the production process, monitoring the assembly lines and even staying all night to make sure enough cars were getting made.

Musk was rewarded for his dedication as the production report was a success for the company and it finally reached one of the many aggressive goals it has set. Production for Q2 totaled 53,339 vehicles, an increase of over 50% from the prior quarter. Additionally, Model 3 production surpassed combined Model S and X production for the first quarter ever.

While some analysts were expecting the company to deliver over 50,000 cars this quarter, Tesla missed these expectations with only 40,740. However, over 15,000 cars were still in transit at the end of the quarter and will be counted in Q3 deliveries instead. Tesla’s target for the full 2018 fiscal year is still to produce 100,000 electric vehicles.

Potential Problems

Tesla currently is the first automaker with a relatively affordable electric car on the market. However, more and more car companies see the potential in the electric vehicle market and will be releasing their own versions in the future. This will increase the amount of competition faces and decrease the high demand that Tesla is struggling to meet for its Model 3s.

Image result for tesla crashA Crashed Model S (Source: Wikimedia Commons)

Additionally, Tesla has faced scrutiny about crashes occurring while the car is utilizing its autopilot mode as well as with batteries igniting after crashes. There have been a few fire incidents over the past few months that the company is currently looking into. Additionally, following a crash that occurred at speeds above 110 mph, Tesla introduced a new feature that allows owner the option to limit acceleration and set a maximum speed limit of 90 mph by entering a 4 digit pin. It is clear Tesla is making improvements based on the feedback it is getting and recently delivered its first electronic update to all cars.

Finally, when Tesla posted its Q2 2018 Vehicle Production and Deliveries Report, the company announced that its head engineer for the past 5 years would be leaving the company. While this could affect development of future models and Tesla’s goal to stay at the forefront for electric car features, it will not affect the company’s current models which are what will impact revenue the most in the upcoming quarters.

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At the end of June, Musk teased the idea of an electric pickup truck, teasing the idea with a tweet:

(Source: Twitter)

While Musk has proposed the idea of a Tesla pickup truck in the past, he is now taking it to the next level by crowdsourcing ideas for features the truck will have. The pickup would not be set for production until 2019, but Tesla is hammered with enough production problems right now so this time will be good to steady Model 3 production.

Technical Analysis

Over the past 3 months, TSLA has surpassed both its 50 day (light blue) and 200 day (purple) Simple Moving Averages (SMA). This indicates bullish momentum for the company.

(Source: Yahoo Finance)

Analyst Recommendations

There is a wide range of analyst expectations for Tesla with ratings from a strong buy to a strong sell as some analysts believe Musk’s promises of profit for the upcoming year while others as skeptical about Tesla’s ability to maintain its current production rate.

(Source: Yahoo Finance)

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The I Know First Algorithm is bullish for Tesla right now in the short and long term. However, the strongest signal is for the one year time horizon which has a signal of nearly 100 and a predictability 0.62 which shows that TSLA should be a strong long term buy.

How to read the I Know First Forecast and Heatmap

Conclusion

The current I Know First bullish forecast and technical analysis reaffirm my opinion that Tesla is a good long term buy. Tesla is hitting the aggressive targets Elon musk is setting and production should only stabilize and increase as the year goes on, hopefully driving the company into profitability for the first time. Currently, the demand for Model 3s greatly exceeds the production, but this is a much better problem to have than the alternative. There are still over 400,000 reservations for Model 3s that the company will work to fulfill. With pickup trucks in the pipeline, Tesla can expand its reach in the automobile market. Additionally, Tesla has revolutionized the electric vehicle market and has been the first to  make a mass market product and with Musk’s high ambitions, Tesla still has great potential.

Past I Know First Algorithm Success With TSLA

On January 8, 2017, the I Know First algorithm issued a bullish long term prediction for Tesla with a stock forecast for the upcoming year. Since then, the stock price has increased by over 40% in accordance with the prediction, highlighting the accuracy of the I Know First machine learning algorithm.

Current I Know First subscribers received this bullish TSLA forecast on January 8, 2017.

Please note-for trading decisions use the most recent forecast.

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