Piper Sandler analyst Alex Potter has increased his price target on Tesla stock from $480 per share to $515 per share while maintaining an overweight rating on the stock.
"We are upping our price target and reiterating our Overweight rating after analyzing two poorly-understood aspects of Tesla's business. These are: 1) the Energy segment and 2) Elon Musk's compensation," Potter writes.
Potter calls Tesla Energy "the topic everyone tries to avoid" due to the lack of inclusion of the business line in many analysts' forecasts. Piper Sandler, however, believes the business has significant growth potential and provides upside to Tesla's valuation.
"We now expect Tesla Energy to eventually exceed $200B/yr in revenue, with TSLA controlling over 1/3 of the market for stationary batteries. We anticipate sharply higher demand for these products, particularly in the late 2020s and 2030s, as renewable energy grows toward 40% of electricity generation," says Potter.
As for Musk's compensation plan, Potter notes the significant drag it has on GAAP earnings, particularly in the second half of 2020 as performance milestones become likely to be achieved.
"[Whenever] performance-based milestones are crossed, triggering another tranche of vested options, TSLA shareholders must endure sudden up-ticks in stock-based comp (SBC). This line item will be particularly burdensome in the next few quarters, with Tesla expected to book stock-based compensation of $1B+ in 2H20. SBC is a non-cash expense, but it does impact GAAP earnings, which is the preferred metric for inclusion in the S&P500."
More information on how SBC impacts Tesla's profitability can be found here.
While the impact will likely be significant in the coming quarters, Potter points out the maximum compensation from the plan has been fixed since the plan was established.
"Importantly, the total expense associated with Musk's plan is known (~$2.3B), so the main question regards the timing of these expenses."
In May, Potter joined Tesla Daily to discuss TSLA stock, Tesla's progress in China, institutional investors, short theses, Tesla Solar/Energy, and more. That conversation can be found in the video below.
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Disclosure: Rob Maurer is long TSLA stock and derivatives.