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Tesla (TSLA) Is Still A Sweet Ride

 December 21, 2012 12:49 PM


(By Kevin Donovan) Like the Mayan calendar and Skeeter Davis (see here), it seems the Tesla (TSLA) bears have been moaning to investors "Don't they-ey know, it's the end of the world …" C'mon, fellas, cover those short positions and be done with it.  For our part, we're reiterating our purchase advice for those comfortable with above average risk.

Tesla shares have appreciated almost 20% since we recommended purchase on Sept. 28.  Our discounted cash flow assumptions point to a $48 price target.  (Our valuation argument can be found here).  While not overlooking the legitimate arguments of the doubters, we can't help but be persuaded that Motor Trend's Car of the Year, the Tesla Model S, is on track to begin generating sustainable positive cash flow and rewards for shareholders.

[Related -Tesla Motors Inc. (TSLA) – 3T Analysis: Driving Towards the 52-Week High]

Indeed, the company's billionaire CEO Elon Musk tweeted earlier this month that the company turned cash flow positive the last week in November. Given that the production ramp veers sharply higher in 2013, we're encouraged.  A 20,000-unit target and a $59,000 base price per car yields $1.18 billion in revenue. Analysts' average estimate for 2013 is $1.63 billion, quadruple the estimate for 2012.

[Related -Tesla (TSLA): Should You Buy Tesla at This Level?]

To be sure, Tesla has yet to post a profit and has drawn down all of its Department of Energy loan facility.  It also had to dip into the capital markets in the third quarter with a secondary offering of common shares that yielded $222.1 million of cash.  Notably, CEO Musk bought 35,398 shares at the offering price of $28.25 per share.  So, clearly, Tesla's need for cash is grist for the mills of the bear camp.  And then there's the hurdle of charging up the all-electric cars.  The car can be charged at home and Tesla has installed "supercharger" facilities in California that enable a range of 300 miles, but the hassle of it all could limit sales.

But the Tesla is no DeLorean in our view.  Though far from widespread now, electric cars are destined to command a significant share of the automobile market, we believe.  By all accounts, Tesla's Model S is a superior vehicle that should claim a leading spot in that growing market.  There is also the possibility a bigger manufacturer might consider buying the company to snag a top-of-the-line model in the electric car market.     

In short, apocalyptic pronouncements are exaggerated.  We would take advantage of weakness caused by "fiscal cliff" fears depressing the entire market to buy Tesla today.
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