Tesla (TSLA) has been in a very bullish trend since breaking above $40, and appears ready to achieve a new 52 week high. Two week ago, Tesla CEO Elon Musk tweeted that we should prepare for a series of 5 events, and the market appears to have taken notice. In my article The High Cost of Shorting Tesla Motors, I stated that I wouldn't be surprised if Tesla doubled by the end of the week. Although Tesla hasn't doubled, it has risen 22 percent since my article was published.
Tesla's first "big announcement.", the introduction of financing options for the Model S, was not what investors were expecting, and prompted a 7 percent drop. However my belief in the company, and familiarity with the type of volatility Tesla has experienced over the past two years, left me with the conviction that with the many "surprises" in store for the next few weeks, the stock was likely to quickly regain its 52 week high.
Tesla's stock had not received any analyst coverage addressing recent developments, or assessing the "surprise news." A well timed upgrade close to Tesla releasing a "positive surprise" could prompt un-hedged shorts to cover. Tuesday morning, a bullish note was issued by Morgan Stanley, causing "new investors" to jump in and prompt the stock to come within one percent of its 52 week high. Although the note did not include an upgrade, it produced the rally I was expecting. With Elon expected to make his second "big announcement" by the end of the week, I wouldn't be surprised to see the stock $50 by the end of the week.
Morgan Stanley Reiterates Tesla Outperform
On Tuesday morning, Morgan Stanley released a note on Tesla, affirming a $47 price target, and the expectation that Tesla will deliver 18,000 Model S in 2013; 2,000 below Tesla's current guidance. The same day, Ben Schuman, an analyst at Pacific Crest Securities, denounced the value of Morgan Stanley's coverage. He affirmed that until Tesla reveals the reservation rate, any upgrades should be taken with a grain of salt.
Along with discussing earnings details, Tesla should offer an update on Model S reservations. While "they don't want to talk about the order book," this will be a critical issue during the earnings conference call with analysts. (Ben Schuman,Pacific Crest Securities)
In my view, Morgan Stanley's price target is very conservative, and fails to account for the "bullish scenario" that Elon Musk believes will happen long term, where Tesla sells 30,000 Model S in 2013, and maintains or exceeds that rate going forward. Although Ben Schuman has a point, and I agree Tesla should release the reservation rate, the data we do have suggests that it is very unlikely that Tesla has a demand problem. If the estimates from Tesla Motors Club are correct, Tesla has been taking about 30-40 reservations per day in Europe for the past month, implying about 12,000 per year. Before Tesla stopped revealing the U.S. reservation numbers, the RPD in the USA was approximately 60 RPD, and according to Elon Musk, the rate is increasing, with Tesla receiving on average two reservations for every delivery.
European deliveries are only beginning, and the RPD is already catching up to U.S. demand. If sales in Europe follow a similar pattern as the United States, Tesla will easily sell 30,000 Model S in 2013, exceeding the "official" guidance, and the "conservative assumptions" being included in Morgan Stanley's valuation. Morgan Stanley has not changed its opinion that Tesla will sell 18,000 Model S in 2013, demand will stagnate around 20,000 units, and 20,000 Model S being sold annually going forward. Nevertheless, Jonas, the Morgan Stanley analyst covering Tesla is "bullish" on the stock. I feel he is being too conservative in his valuation. If Tesla is indeed taking 100 RPD, Elon's "bullish" long term objective to sell 30,000 units annually is beginning to look "near term."
If Elon Musk confirms Tesla is taking 100 RPD, and that Tesla will produce and sell 30,000 Model S in 2013, Morgan Stanley will likely increase their price target for Tesla's stock to above the initial target of $70 that they had initially given the stock before downgrading it on fears that "Electric Cars are not ready for prime time." The $70 price target assumed that 20,000 Model S would be sold in 2013. If Tesla can prove to Wall Street, and Morgan Stanley that The Model S is ready for prime time by producing and selling 30,000 Model S in 2013, I am confident that numerous upgrades will follow.
30,000 Model S, with an ASP of $75,000, Gross Margins of 25 percent, and $10,000 from ZEV credits for each Model S sold would result in Tesla earning $400 million in 2013, assuming Capital Expenditures of $400 million. If Tesla maintains a PE of 40, and sells 30,000 Model S, Tesla can realistically achieve a $16 billion market cap in 2013, translating into the $144 price target I described in my article Tesla Model S Owners Could Realize Amazing Savings.
Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.