Year to date, Tesla (TSLA -1.11%) shares are up nearly 40%. Considering that the S&P 500 has risen 8% during this same period, investors are likely pleased with this year-to-date performance. But this analyst thinks the stock has plenty of room to run. Piper Sandler analyst Alex Potter has a 12-month price target for the stock of $280 -- a price tag that implies more than a 60% gain from here.
This bullish view for the growth stock comes as many analysts have lowered their price targets substantially recently, citing the company's narrower profit margin thanks to aggressive price cuts on Tesla vehicles this year.
Let's take a look at what's behind Potter's optimistic view for the stock.
The path to $280
First of all, it's worth noting that Potter did join many other Tesla analysts in downgrading his 12-month price target for the electric-car maker following the company's report (though he initially resisted doing so). Before he lowered his price target to $280 last week, the analyst had a $300 target for the stock. His updated view reflects his lowered estimates for the company's financials between 2023 and 2025 as Tesla works through the near-term impact of lower prices and demand risks in an uncertain macroeconomic environment.
But a $280 price target, of course, is still very bullish. Based on the analyst's recent notes to investors, Potter's bull case includes praise for Tesla's ability to fund its own business thanks to its strong free cash flow and an expectation for profit margins to eventually expand again thanks to high-margin software sales. Notably, Tesla's driver-assist software packages are extremely pricey, with Enhanced Autopilot costing $6,000 and the company's more advanced driver-assist technology that Tesla hopes will eventually enable its vehicles to drive themselves costing $15,000. For those who don't want to pay the upfront expense for Tesla's driver-assist software, these packages can also be accessed with monthly subscriptions.
Software could unlock tremendous profits
Potter's view reflects Tesla CEO Elon Musk's. The CEO said in Tesla's first-quarter 2023 earnings call that he believed the company would achieve full self-driving capability this year. This, he thinks, will help generate massive profits for the company.
"We're the only ones making cars that -- technically -- we could sell for zero profit for now and then yield actually tremendous economics in the future through autonomy," Musk said during the conference call.
Musk's plan is for full self-driving vehicles to not only make life easier for their owners but to also generate money for them as they deploy their vehicles into an autonomous taxi network. This is, no doubt, an exciting vision. But there's no guarantee Tesla will pull this off in the near future.
Notably, even Potter likely doesn't anticipate Tesla achieving full self-driving capability this year. The CEO has a long history of overpromising and underdelivering when it comes to autonomous driving features.
The monetization of self-driving production vehicles is unchartered territory. Indeed, even a forecast for driver-assist software leading to a significant increase in profitability is somewhat speculative. There are simply many risks to the bull case for software leading to much greater profit per vehicle in the coming years. With all of this said, Tesla shares could absolutely skyrocket if the company is able to execute on its self-driving and vehicle software vision as well as management hopes it will.
