On Tuesday, Tesla (NASDAQ:TSLA) reported production and delivery numbers for the second quarter, exceeding analyst estimates, and the market cheered. The much-needed tear in TSLA stock is just the beginning as Elon Musk & Co. launch multiple catalysts to take TSLA beyond $300.
Tesla’s stock price was trading at $179 on June 3, 2019. After its delivery blowout, TSLA now trades at $232.
I believe that the positive momentum is likely to sustain for Tesla in the medium-term, and this article discusses the factors that will support Tesla’s upside bull case.
The Gigafactory Trigger
Tesla’s gigafactory in Shanghai — on track for completion toward the end of 2019 — will provide Tesla bulls with positive stock momentum in the coming quarters. Here’s why:
The first phase capacity is expected at 150,000 vehicles. With production within China, Tesla can potentially eliminate significant logistics cost. Even if the U.S. remains ensnared in trade disputes, Tesla can avoid most negative impacts of import duties.
In addition, one of the biggest concerns for Tesla has been failure to curb cost and generate positive cash flows. The gigafactory will produce Model 3s that are 50% cheaper than the current production cost.
It is worth focusing on China because the country is the second largest market for Tesla after the United States. Importantly, China’s electric vehicle market has grown at a robust pace.
According to Clean Techinca, China’s electric vehicle sales growth was 113% (year-over-year) for the first quarter of 2019. Further, according to JPMorgan, China is expected to account for 59% of global electric vehicle sales in 2020 and 55% of global electric vehicle sales by 2025.
Therefore, the gigafactory is likely to ensure that production growth and sales growth sustains in 2020. In particular, Tesla’s Model 3 is outperforming, and production in China will focus on this model at the onset.
The Model Y Trigger
Tesla has already commenced taking orders for Model Y with production expected to start in late 2020. What’s interesting about the Model Y is that Tesla will price the all-electric compact SUV at $48,000. This is likely to be lower in price by $20,000 as compared to other all-electric SUVs in the market.
Therefore, there is a potential sales growth catalyst in late 2020, which can extend well into 2021 if the market response for Model Y is positive.
The point I am making here is that 2Q19 results are positive, 3Q19 outlook is positive and, once production commences in China, Tesla’s sales growth will trigger positive momentum in TSLA.
In other words, there are enough reasons to be bullish Tesla stock for the next 12-18 months.
Bottom Line on TSLA
Tesla has already trended higher since the beginning of June 2019 and I believe that the rally will sustain in the coming quarters. Among the risk factors, global economic slowdown remains a concern for car markets. However, Tesla is relatively insulated as demand for electric vehicles remains strong.
While it might be too early to discuss, Tesla is also scouting for land to set up a gigafactory in Europe. This underscores the bullish case for TSLA stock as Elon Musk & Co target production diversification. This will reduce the logistics cost, among other costs, and potentially boost the company’s EBITDA margin.
Sustained cash burn has been a key challenge for Tesla and possible improvement in key margins and operating cash flow can send TSLA on a bullish run.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
