Jefferies: 5 Factors Protecting Tesla Model 3 Margins

Tesla Inc TSLA has managed to hold its post-earnings gains over the last month, and some on the Street think the stock remains undervalued.

The Analyst 

Jefferies analyst Philippe Houchois maintained a Hold rating on Tesla with a $360 price target.

The Thesis

Jefferies assumes Model 3 average selling prices will remain above $50,000, but nonetheless anticipates a decay in metrics.

In the near-term, the following are seen to protect gross margins, Houchois said in a Wednesday note. (See his track record here.)

• The launch of the lower-range battery and related assembly improvements;
• Lower labor costs;
• Component cost savings;
• Reduced scrap; and
• Depreciation leverage of about $1,000 per vehicle.

“Tesla expects the erosion of Model 3 ASPs can be moderated through international sales (launches in Europe and China in H1) focused on high mix version and the introduction of leasing offers with attractive residual values,” the analyst said. 

The increasing functionality of Autopilot’s Navigate control is expected to heighten vehicle demand, he said. 

Tesla's comments on store efficiency and the utility of charging stations indicate a low risk of selling, general and administrative expenses rising in the next three quarters, Houchois said. 

Given that competing EV models target the $80,000 consumer range, Jefferies is concerned about the prospects of the Model S and X heading into 2019.

Price Action

Tesla shares were up 0.55 percent at $345.80 at the time of publication Wednesday. 

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Photo courtesy of Tesla.