Time to Consider Tesla, Warts and All (Update 1)

Updated from 8:59 a.m. to include second page of analyst comments.

NEW YORK (TheStreet) -- Tesla Motors (TSLA) shares have been beaten up over the past couple of months, plagued by safety concerns and a weaker-than-expected guidance. One analyst believes it's now the time to start looking at the stock.

Deutsche Bank analyst Dan Galves, who rates shares "buy" with a $200 price target, said he sees a number of positive catalysts over the next several months that could boost sentiment in the stock. He notes a favorable resolution of the investigation on Model S fires domestically as the number one reason. "Given that the vehicles performed very well in protecting the vehicle occupants (highlighted by NHTSA in its investigation notice) and that the software update will result in a similar ride height to other luxury vehicles, we believe that a benign outcome is high probability," Galves penned in his note.


Subsequent reasons include "[i]nitial news on order flows out of China, increased production and accelerating orders, and continued improvement in gross margins and operating expense leverage. On Tesla's third-quarter earnings call, CEO Elon Musk noted Tesla is supply constrained, and actually had to starve North American demand to get the approximate 1,000 Model S units shipped to Europe. "The main constraint on our production is really is the cells, and I think I have mentioned that before in talks," Musk said on the call. "And I think I alluded on that on prior earnings call, so we were addressing the cell supply constraints and any sort of constraints that are non-cell constraints that exist, but the critical thing is the cell production constraints."

Earlier this week, CEO Musk noted sales of the Model S are higher than expected. When Tesla reported third-quarter earnings earlier this month, the company said it expects to deliver slightly under 6,000 Model S units in the fourth quarter, as the company is extremely supply constrained.

Now that shares have come down from their highs of $194.50 set on Sept. 30, Galves notes the earnings multiple looks reasonable, ahead of the third generation car. "We believe that its significant that the current price of Tesla shares is now only pricing in pre-Gen 3 (mass-market vehicle) earnings levels, which we see as important support point for the stock," Galves wrote in the note. Shares are trading at trading at 13x 2016 EBITDA and 22x 2016 EPS, based on 56,000 units of the Model S and Model X, Tesla's upcoming SUV.

Galves also recently talked to CFO Deepak Ahuja, who "reinforced confidence in mid-term production and margins." Galves noted Tesla ultimately wants to get up to a production rate of 800 vehicles per week by Q4, versus the expected 550 a week in the fourth-quarter. The recent deal with Panasonic (PC) for more lithium-ion battery cells should help that.

Tesla has been guiding gross margins to 25% excluding Zero Emission Vehicle (ZEV) credits, a level reserved for some of the world's most prestige auto brands. In the third-quarter, margins were 21%, and Musk and team appear confident they are well on their way towards achieving that goal. Galves believes they could get to 25%, and then blow past that. "Gross Margins appear to have substantial room to move higher than 25% (consensus implies only 25% through 2015) given the option pricing increase in early August (had no impact on Q3) and further cost efficiencies."

Shares of Tesla were higher in early trading, up 1.6% to $122.98.

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