The electric car maker, Tesla (TSLA, Financial), is slated to launch its Model 3 by 2017 and expects the sales chart to peak to 40,000 sold vehicles within a year after the launch. The car maker is also scheduled to launch the Model X SUV in 2015, to sell alongside the current Model S. Investment bank, Morgan Stanley (MS, Financial), had sounded optimistic on Tesla’s future offerings when it announced that Model S and X could combined reach an annual volume of 150,000 sales units by 2020 and Model 3 is anticipated to reach 220,000 sales units by 2020 and 775,000 sales units by 2028. But recently, Morgan Stanley seems to be undervaluing Tesla and has cut its sales guidance provided earlier. What’s the complete story of the guidance being lowered for the car maker? Let’s dig deeper to get to the facts.
Morgan Stanley takes the crude stand
Recently this month, Morgan Stanley cut its Model 3 sales guidance to 150,000 by 2020 and 400,000 by 2028. Average transaction price should however advance to between $55,000 and $60,000 in 2020. The base price when it first comes on sale should be between $35,000 and $40,000, with the average transaction price of $60,000.
The success of the Model 3 of Tesla depends on three factors: The ability to reduce costs on the battery powerpack, the cost of the internal combustion technology, and the fuel prices. As Tesla cars fall in the premium category, which sees few buyers of electric vehicles, Morgan Stanley analysts have viewed such sales target as unachievable.
The company may very well fail to sell 500,000 EVs by 2020, it should not sound surprising as the set goal is too ambitious for Tesla. But missing the goal by around 40% as predicted by Morgan Stanley might not be reasonable as well.
Despite the sales projections cut by Morgan Stanley, analysts opined that Tesla's Model 3 could aid the auto maker to enter the mass market. In fact, Morgan Stanley has the opinion that Tesla’s success would not depend on making the traditional internal combustion engine obsolete. Instead, it would depend on Tesla’s ability to achieve better battery as cost savings would enable quick improvement in the sales chart. This will largely depend on when the Gigafactory becomes operational for Tesla which will bring down the battery costs remarkably.
Tesla: A risky investment
Despite the recent adjustment in sales, Morgan Stanley believes that investors can still buy the stock though it has become riskier. The risk is due to very high expectations build around the stock that suggests very high mass market volume targets for the new models in just a few years.
As oil prices are slated to dip further, it could affect the stock which is down 31% in a period when the oil price dip was close to 42%. This signifies that Tesla was successful in maintain its stand even when the price of oil was almost bottoming out.
Ascendiant Capital Markets analyst Theodore O’Neill also believes Tesla’s share price is moving proportionally with oil prices. There is a possibility that shares get trapped between low energy prices and an end-of-the-year sell-off, O'Neill said. He has a Buy rating on Tesla with a price target of $320.
Last word
Tesla is currently in murky waters after Morgan Stanley cut its guidance on the sales target set earlier on the company models. However, as 2020 is still six years away and there is every chance that the economic climate gets better within the time horizon and the current dip in oil prices is converted into a boost in oil prices, it would be too early to flag the Tesla stock as a risky investment in the long term. Maybe that’s why even the Morgan Stanley analyst stated –“Tesla is an excellent risk-reward investment for those not holding their breath for mass market EV glory…” So it’s best to wait and watch in the days ahead for further news from the company’s desk.
