Photo: Reuters

Jeffries analyst Philippe Houchois has raised his Tesla (NASDAQ: TSLA) price target by 47% to $1,400 from $950. The analyst believes Tesla looks more scaled up today than most OEMs, and is in a position to turn the legacy zero-sum game into a negative one.

Jeffries analyst Philippe Houchois believes Tesla's price is sending a warning of relevance to traditional and also challenger OEMs. With an acceleration of self-funded growth in Q3 and un-heard-of returns at a brand price point moving towards volume segments, Tesla looks more scaled up today than most OEMs and is in a position to turn the legacy zero-sum-game into a negative one. As such, the firm raises estimates 16% across P&L and FCF, and boosts its price target to $1,400.

Tesla to Industry: more scary near-term than bullish long-term
Tesla’s last 2 sets of results have impressed on all metrics, with Tesla continuing to leverage R&D and SG&A. Adjusted for ZEV and CEO special comp, Q3 "GAAP" margin reached 14.2%, mainly from hardware according to CFO Zach Kirkhorn. Gross margin of 28.8% validates hopes of a more profitable EV world ahead. Near term, the difference reflects multiple competitive edges which Jeffries sees lasting longer than many investors think, from direct selling to battery density/cost, software, chip design/sourcing and design-to-manufacture, altogether avoiding the complexity and inefficiency that are plaguing the industry's business model. OEMs are responding slowly and only one or two challenges at a time.

Auto domination?
Houchois wrote that the firm has long resisted the idea Tesla could sell 20 million units by 2030 (20-25% global share) given the industry's size, strategic importance, and political support. Jeffries still does, but conviction is weaker considering the accelerating gap in growth and profitability. Without dismissing execution risk, Tesla is getting to a position where it can balance affordability and speed, goals which are as important as profitability in Elon Musk's vision. As the model range and price points move away from BMW or Mercedes towards mid-market, with a yet to be confirmed $25,000 model, Tesla looks set to gain share from large OEMs, potentially claiming a disproportionate share of the industry profit pool in the coming 3-5 years as legacies enter the margin dilutive EV transition phase. VW or GM may soon sell more EVs than Tesla but "de-growth" in ICE accelerates the loss of scale while Tesla demonstrated an EV OEM can scale up at lower volume. Bsheet could be the next topic with net cash c. $8bn (ex Bitcoin gain, 15% of annualized revenue) and NWC adding to high cash conversion and creating further opportunities to accelerate growth including captive financing.

Raising 2021 - 23 estimates c.16%
Jeffries raises both growth (3 million by '25, 39% CAGR, (32%) guidance 50%) and profitability assumptions with EBIT margins 3-4points higher to 16+% in its forecast period...The firm has assumed:
1) capex scaling from 12% to 6.5% of revenue by 2025 to $10.6 billion or $35bn to add 2 million units of model/capacity and
2) -ve NWC supporting FCF. The firm's GAAP EPS for 2022-23 is $6.7-9.7

Valuation - Jeffries raise its price target to $1,400
Valuing Tesla is not getting any easier. Material upgrades in the 2022-25E period help. Earnings momentum is set to remain a multiple of Legacy, with the latter's risk profile is inversely linked to Tesla growth. The "normalization" of Tesla is inevitable but years away in the firm's view as Tesla's auto growth and ROIC remain multiples of legacies and Tesla branches out. Tesla is trading on 10x and 75x 2023E revenue and EBIT.

H/T @SawyerMerritt/Twitter

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