Why One Analyst Is Gaining Confidence In Tesla's Potential For Profitability

Tesla Inc TSLA is on track to commence limited production of the Model 3 in July. With increased confidence in the model ramp and the company reaching profitability, RBC Capital Markets’ Joseph Spak said in a report.

Spak maintains a Sector Perform rating on the company, while raising the price target from $245 to $314.

Model 3 Production

Tesla has plans to ramp Model 3 production to more than 5,000 per week in Q4 2017 and to 10,000 per week in 2018. The company has continued to record orders for Model 3.

Related Link: Tesla Beats Q4 Sales Estimates, Global Orders Up 49%

Management has expressed optimism regarding Model 3 profitability, indicating its gross margin could be similar to that achieved with Model S/X at a production rate of 5,000 per week. This is a significantly higher projection than management’s prior indication that Model 3 would be 5–10 percentage points below Model S/X at full ramp, Spak noted.

Model 3 production and profitability would be “the key factor for the stock,” the analyst mentioned.

Other Factors

Management is prioritizing cash preservation over solar growth, following Tesla’s integration with SolarCity Corp SCTY).

Model S/X could be stagnating, with management projecting 40,000-50,000 deliveries for the first half of 2017, essentially flat with the figures recorded in the second half of 2016.

At last check, Tesla shares were down 1.9 percent at $268.30.