Tesla Model 3
Tesla Meets Model 3 Production Target At Last.
Berenberg Bank Still Thinks Tesla Can Fight Off Traditional Challenges.
Tesla Inc finally showed investors it could make lots of Model 3s, but was then hit by reports it was struggling to deliver them all.
Meanwhile long-term supporter Berenberg Bank reaffirmed its hopes for Tesla, with a target of $500 for the share price. Given that Tesla has tumbled from a high for the year of close to $388 to its current $260, that’s a brave call.
In early October, Tesla said it made 53,239 Model 3s in the 3rd quarter up from the 2nd quarter’s 28,578. In August CEO Elon Musk predicted Tesla would make between 50,000 to 55,000 in the latest quarter.
Berenberg Bank said investors need to be convinced about Tesla’s long-term profitability.
“In our view, the market probably underestimates Tesla’s earnings and cash flow potential, as benefits from better fixed cost absorption, manufacturing efficiency gains and falling costs of batteries and components more than offset declining ASPs (average selling prices) over time. We expect Tesla to become self-sustaining, and consider worries about its balance sheet and cash flow generation to be overblown,” Berenberg analyst Alexander Haissl said in the report.
Haissl said market perception that Tesla can’t make money is wrong. He repeated his claim that traditional manufacturers won’t easily rollover Tesla.
Tesla’s technological advantage
“This underestimates the full extent of Tesla’s technological advantage, which manifests in the entire electronic architecture of the vehicle as well as the battery management system. This advantage and superiority should become more visible and important once traditional (manufacturers) launch their next-generation EVs, as it underpins Tesla’s leadership even further,” Haissl said.
“Traditional (manufacturers) are likely to struggle to narrow the gap more meaningfully, as it requires a radical rethink of the entire vehicle electronic architecture. The hurdles that traditional (manufacturers) have to overcome are higher and more difficult to solve than Tesla’s initial manufacturing issues,” Haissl said.
But ratings service S&P said Tesla profitability remains insufficient to support solidly positive cash flow.
“Tesla’s Model 3 gross margin performance has lagged our expectations somewhat over the past few quarters, and we believe it could take at least a year to improve to 25 per cent, which we view as commensurate with solid free cash flow,” S&P said.
Moody’s Investors Service reminded investors that $1.15 billion of Tesla’s debt matures between next month and March 2018.
Moody’s said increased Model 3 production made it more likely that this debt hurdle could be jumped without recourse to more borrowing. Trade tensions with China though will have the opposite effect.
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