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Stifel Affirms Tesla (TSLA) at 'Buy' Ahead of Q1 Report; Mix-Shift to Model X Could Bolster Revenue Gains

May 3, 2016 11:00 AM

Stifel is out with commentary on Tesla Motors (Nasdaq: TSLA) ahead of the company's Q1 report on Wednesday. The firm reiterates its Buy rating and $325 price target on the stock.

Analyst James Albertine commented: In early April, Tesla reported 1Q16 deliveries of 14,820 (12,420 Model S, 2,400 Model X), which was below our 16,000 estimate (in line with prior Tesla guidance) at the time as fewer Model S deliveries were offset by 900 more Model X deliveries relative to our prior model. That said, as early delivery Model X transaction prices are likely higher than current Model S deliveries, the mix shift favoring the X could drive revenue outperformance vs. our model. We note TSLA reiterated its goal for 1,000 Model X units produced per week by the end of 2Q16, having ended 1Q16 at roughly 750 units per week.

Despite Model X launch hiccups, including a 2,700 unit recall related to third row seats that could fold forward during a crash, we think management approached this as an opportunity to showcase its world class customer service and may have improved the brand. We would add that as recalls are occupational hazards for essentially all OEMs, customer service during a recall speaks volumes about the brand and we think TSLA is testing well with customers, though expect a slight increase in warranty expenses.

In terms of 1Q16 results, we believe investors will focus on guidance for (a) FY16 deliveries (we expect a reiteration of the 80-90k unit range), (b) automotive gross margin (we believe management will reiterate 30% Model S and 25% Model X targets by FY16-end), (c) expense ramp (guidance for slight sequential increase in 1Q16 from 4Q15, +20% y/y in FY16 vs. FY15), and (d) cash flow expectations/burn rate vs. recent quarters.

As it relates to free cash flow, there are some expecting TSLA will need to raise funds via the capital markets in 2016. We agree this seems logical, given better than expected Model 3 demand perhaps necessitating a pull forward of production-related investments. However, our sense is management will defer this decision until later in the year, choosing to reiterate current guidance (no capital raise) in its 1Q16 report. We do hope TSLA provides more detail on the Gigafactory (production ramp, state/amount of ongoing investment, details related to key partnerships) and perhaps on Model 3 production line construction.

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