Ignore the current bout of pessimism surrounding electric carmaker Tesla Inc. (TSLA), says venture capitalist Gene Munster, formerly a respected technology sector analyst for 21 years at Piper Jaffray, and now at Loup Ventures. Despite a higher than expected loss in its latest quarterly report, and production delays surrounding its new Model 3, Munster makes the bold prediction that Tesla will be “the best performing large cap tech stock in the next five years,” in an interview with CNBC.
Those problems have pushed Tesla’s stock down by more than 20 percent from its June high, including a decline approaching 8 percent in early afternoon trading on Thursday.
So it’s safe to say that Tesla founder and CEO Elon Musk is feeling the heat. He’s keeping virtually an around-the-clock vigil at the Model 3 assembly plant, personally supervising efforts to get production on track, Fortune reports. Meanwhile, Munster is confident that Musk will deliver on his promises, with production of 5,000 Model 3 cars per week reached in the first quarter of 2018. He projects that Tesla will become profitable in the third quarter of 2020. Around that time, he adds, driverless cars should be gaining traction, and he expects Tesla to assume a leading position in this technology. Moreover, in the 2020 to 2030 time frame, Munster expects that Tesla will reach another of Musk’s goals, becoming a major global player in renewable energy such as solar power.
Bolstering Munster’s optimistic view, many skeptics said Musk could not even build an electric car. When he did, they said that he could not sell them commercially. But he did just that: first, with the Tesla Roadster sports car, and then with the Model S sedan. Tesla’s stock has risen 68% during the past year, and 998% in the past five years, making for a more than spectacular return for the bulls and leaving Tesla’s bears, well, in the dust. Munster sums up his view by calling Tesla “the biggest opportunity in tech over the next five years,” per CNBC.
Model 3 Challenges
Tesla’s future, of course, hinges on Musk’s mass market car. “Model 3 is a smaller, simpler, more affordable electric car,” per Tesla’s website. With a range of 220 miles, prices start at $ 35,000. The company indicates that orders placed now will be delivered in 12 to 18 months. However, these already very long lead times are based on projections that 5,000 Model 3 vehicles will be produced each week by the end of 2017. Achieving that level of production now seems unlikely before March 2018, Fortune says. Indeed, the company’s target of 2,000 Model 3 units being assembled in the third quarter was missed badly, with only 236 actually produced. Musk blamed problems with a subcontractor supplying a battery module, and the need for extensive rewriting of related software.
Meanwhile, analysts cited by Fortune estimate that the profitability of the Model 3 is heavily dependent on producing 10,000 units per week, but Musk recently declined to offer a timeline for achieving this level of output. However, earlier Musk had indicated that, after reaching 5,000 per week by the end of 2017, he would achieve 10,000 per week sometime in 2018, according to The Wall Street Journal. Additionally, Musk has written that reaching 5,000 units per week will be sufficient to “generate significant cash flows from operations,” per the Journal.
Analysts are split on Tesla, with roughly equal numbers rating it a buy, a hold, or a sell, per CNBC. Moreover, their average price target is $ 321, roughly equal to Wednesday’s close, according to Reuters data cited by CNBC. Tesla opened just above $ 300 on Thursday. UBS Group analyst Colin Langan is particularly negative, writing in a recent research note that all Model 3 targets now lack credibility, and lowering his price target to $ 185, which is 42% below Wednesday’s close. Meanwhile, another Journal article raises concerns over the high cash burn rate at Tesla, $ 1.4 billion in the third quarter, and its “long history of questionable forecasts.”
A year ago Musk was forecasting that as many as 200,000 Model 3 units would be produced in the second half of 2017, the Journal notes. At the moment, Tesla is far off that mark. This means the carmaker will have to get back on track – and quickly – to have any chance of fulfilling Munster’s prediction that Tesla will become the top big tech stock one day.