What a difference a (half) year makes. Six months ago, analysts at top-ranked investment bank R.W. Baird downgraded shares of Tesla Motors (NASDAQ:TSLA) on worries that the all-new, all-electric Model X SUV cost too much to sell well, and that the "timing" of the car's "production ramp" was uncertain. The stock, which had been trading around $260 a share at the time, quickly sold off.
Fast -orward six months, though (and past multiple sell-offs and rebounds), and Baird is back again today -- this time with an upgrade for Tesla Motors.
As reported on StreetInsider.com this morning, Baird is upgrading Tesla shares to outperform, and predicting a share price far in excess of $260 -- $300 per share, in fact. That fact alone appears to be encouraging investors, who bid up Tesla shares nearly 4% this morning, even as the rest of the stock market lay flat, and perhaps rightly so. After all, according to our records here at Motley Fool CAPS, Baird has a strong record on its past Tesla recommendations, racking up in excess of 650 percentage points of market outperformance on its past picks.
But is Baird right about Tesla this time? Here are three things you need to know about the upgrade.
Thing No. 1: Model X is doing fine
Production rates on the gull-winged Model X sparked Baird's concern back in October, but six months on, these worries seem to have abated. "Recent data points show production is accelerating, which should drive deliveries and margin expansion throughout 2016," says Baird.
And the analyst adds that investor worries over the Model X introduction mirror past concerns over the Model S -- and that car seems to be doing just fine.
Thing No. 2: Tesla leads the pack in battery...packs
Another thing that could help Tesla with "margin expansion," says Baird, is the fact that "TSLA is ahead of expectations on reducing battery costs, and continues to have a significant lead on competing EVs."
At constant sticker prices, lower costs on batteries obviously imply higher profits for Tesla Motors. Lower battery prices also give Tesla more ability to be flexible on its prices as new electric car offerings come out from the likes of BMW and General Motors (NYSE:GM). (GM, as you may have heard, is expected to begin sales of its Chevy Bolt EV sometime next year.) And if cheaper batteries permit Tesla to stick more batteries in its cars -- that should preserve Tesla's advantage on vehicle range as well.
Thing No. 3: Tesla's got the cash it needs
At last report, S&P Global Market Intelligence clocked Tesla at more than $2.1 billion in annual negative free cash flow for 2015 -- more than twice the amount of cash the company burned in 2014. So a perennial worry for Tesla investors is the fact that the company's continued (and accelerating) rates of cash-burn will prevent it from funding development of new car models, and/or force the company to sell new shares (depressing the price of existing shares) to obtain the cash it needs.
Baird doesn't see that as an issue, though.
To the contrary, according to StreetInsider, Baird sees no need for Tesla to raise cash for at least "the next few quarters," and notes that the company's access to bridge financing from its banks "remains robust."
And one more thing...
Obviously, we'd prefer to see Tesla earning profits, generating positive free cash flow, and paying for development of its cars on its own, rather than borrowing the cash from the bank. But easy access to bank credit is better than nothing, and it at least seems to be reducing the risk of a big wave of stock dilution that would hurt the share prices of current investors.
Meanwhile, the company's continued lack of profits does have at least one upside: No one's expecting Tesla to turn profitable any time soon. (Even Wall Street analysts don't expect Tesla to report its first, small profit, before 2017.) Thus, continued reports of money-losing quarters aren't likely to do much damage to the stock. What really matters here is the news flow.
In this regard, Baird notes that "investor skepticism has significantly increased since we downgraded TSLA on Oct. 6." At the same time, Baird predicts that the headlines are actually going to look better than feared. This sets up the possibility that positive reports of Q1 deliveries, positive news on Model X production rates, and the impending release of the Model 3 electric car will all combine to a short squeeze among Tesla pessimists -- driving the shares up instead of down.
Up as much as $300 a share? Baird thinks so -- and time will tell.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 278 out of more than 75,000 rated members.
The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.