Tesla Motors (TSLA +0.97%) knows how to win friends and influence people (on Wall Street).
This morning, for the second time in as many weeks, Elon Musk's favorite electric car maker won a big upgrade when analysts at Argus (rated in the top 10% on Motley Fool CAPS) announced the stock has just become a "buy." While acknowledging that Tesla has struggled to keep its production numbers up and its costs down in recent months, Argus believes Tesla is getting a handle on these problems just in time for its Model X to go into production.
According to Argus, what this means for investors is that Tesla shares that currently cost just $235 or so apiece could be worth as much as $333 within a year -- that's a 42% profit in just 12 months. And that's not all.
Here are three more things you need to know about Argus's big upgrade.
Artist's rendering of Tesla's Gigafactory. Image source: Tesla Motors.
Thing 1: Costs will come down
As with R.W. Baird's upgrade last week, battery technology is key to Argus's endorsement of Tesla this week -- and here's why: Tesla has completed construction of its "Gigafactory" battery production plant in the Nevada desert.
Depending on the manufacturer and the model, battery costs are estimated to make up anywhere from 25% to 50% of the cost of an electric or hybrid-electric vehicle. By mass-producing the things, though, Argus believes Tesla will be able to drive its own battery costs down by 30%. Not only will this help Tesla reach its goal of producing the new "Model III" sedan at its targeted $35,000 sticker price, it will also make it easier for Tesla to underprice cars with less brand recognition than the Tesla (such as General Motors (GM +0.46%) and its upcoming Chevy Bolt). That could make choosing Tesla over the competition a no-brainer for car buyers.
Thing 2: Lower costs will yield immense profits
Over the long term, lower-cost battery production could do fabulous things for Tesla's profit margins. In a StreetInsider.com write-up of Argus's rating, it was revealed that Argus has just doubled its profits projection for Tesla in the 2017 fiscal year.
Previously, Argus thought Tesla would earn less than $1.60 per share (pro forma). Now, with its Gigafactory up and running, Argus believes Tesla could earn as much as $3.21 per share -- and reap revenues of as much as $11.2 billion.
Thing 3: This newfound profitability won't be immediately obvious
Here's where the profit opportunity really grows for investors. According to Argus, cost savings from the Gigafactory will not make themselves felt immediately. Indeed, costs are actually going to rise for Tesla in the current year.
Accordingly, Argus is cutting its pro forma profits prediction for Tesla from $1.48 per share to just $1.25 per share in 2016. According to reports from S&P Global Market Intelligence, that's actually below the average earnings expected by most analysts on Wall Street.
And one more thing...
Do you see what's happening, here? If Argus is right about its 2016 profits projection, then investors who own Tesla today could be disappointed by the company's performance this year -- potentially getting scared out of the stock, and driving the price down. And yet, if Argus is also right about the rebound in profits in 2017, then selling Tesla this year is exactly the wrong thing to do -- and the wrong year to do it in.
I have to say, Argus has laid out an intriguing scenario, here, highlighting what could turn out to be a faulty interpretation of the stock, and setting up the possibility for beaucoup profits for Tesla shareholders who keep the faith. And given what we know about Argus -- namely, how its recommendations have outperformed more than 90% of all other investors we track here on CAPS -- that's an intriguing possibility.
