by Chaim Siegel of Elazar Advisors, LLC

Tesla (NASDAQ: ) is going to be a momentum story this year, one that's probably going to run over the shorts. Production and deliveries will meaningfully accelerate in the fourth quarter. Even though we expect earnings misses versus Street numbers, we don’t think it matters. It hasn’t mattered till now.

What matters is the Model 3 launch, volume and scale. That will give credibility to the valuation as we look out to 2018.

Tesla Weekly 2014-2017

Short Interest Will Drive Stock Upside

Some investors hate Tesla with a passion and some love Tesla with equal passion. With about 25% of the stock's float short, we think the “haters” are about to get run over. If the company hits their plans through this year, deliveries are going to jump in the fourth quarter.

That can act as proof-of-concept for the Tesla story, driving production volumes and operating leverage. And that will drive optimism for 2018.

We think the shorts are playing with fire ahead of this. They may not have much confidence in management, but if the company is close to targets, look out shorts.

Company’s 2018 Targets Not Far-Fetched

The Model 3 begins to ship in Q3 with volume production in Q4. There are estimates of at least 400,000 Model 3’s on order. The company is expecting production capacity of 500,000 units in 2018. If the order numbers are right, the company’s estimates for 2018, while huge, are not so crazy. Huge is bullish.

Q4 Jump

Again, we speak to the shorts. Q4 is this year. There is likely going to be a huge jump in revenues and profits in Q4 with the Model 3 launch. How can you be short for that?

The company gave their launch schedule for the Model 3 during their last earnings conference call in February. They expected production of 5,000 Model 3’s by year-end 2017. To us that sounds conservative and it could be better than that.

If you heard what they said about their supply ramp schedule it’s faster than “5,000 by year-end.”

They told suppliers they need the ramp to be 1000 in July, 2000 in August and 4000 in September. That ramp means that October should be, our guess, higher than September. That jump in October could be more than the jump from August to September. That means already by October you are at their “5,000 by year end.”

We’re assuming a big sequential jump (quarter to quarter) in Q4. That’s based on simply adding the Model 3 to the Model S and X.

That jump in revenues should drive margin leverage as they hit production scale. This scale can prove much more efficient than the S or X because the same volume is coming from one model this time as opposed to two models previously. The extra volume should help overall production efficiency for the S and X as well.

Modeling Earnings

Everybody can make their own assumptions. There is no way to know what is actually going to happen. We can only estimate and we give you our estimates.

We want to try to forecast how the market will value Tesla: what earnings will the market hope for as the company starts to hit their targets.

Tesla met their sales projection for 25,000 units this quarter. That puts them inline to hit their first half guidance for deliveries. Based on that current trend of hitting targets, we think the company has the ability to hit some of their other forecasts, namely for the Model 3.

The demand is there, the production experience is there and this ramp should be much bigger.

To have an opinion on Tesla stock we feel you have to work through the numbers to see if they make sense.

Here’s our take. You can play with the numbers based on your own take.

Tesla Auto Revenue

We take the planned production of Model 3 and haircut it for deliveries that slip. We then add on the S and X sales to get to our Auto Revenue numbers. Model 3 is going to be selling for a lower price so we account for that as well.

This is the most important part of the story this year and the jump in revenues is meaningful.

If you add up the deliveries in 2018 in our model you get to 350,000 units delivered. The company said they can hit 500,000 in production in 2018. CEO Elon Musk said that’s the “most likely outcome.”

So if anything, we’re conservative, which is pretty nuts.

Our Earnings Are Below The Street This Year But, Really Who Cares…

If Volumes Hit This Year, 2018 Is All That Matters

Our 2017 numbers are below The Street. But really, who cares. If either of us are correct on Q4, you have to start thinking why wouldn’t Q1, Q2 and Q3 earnings of 2018 be higher than Q4 2017? If that happens, this turns into a huge story. (See our model, below)

We’ve seen that the stock does not solely move on earnings. We think the stock moves on the visibility of the outlook. We expect that visibility to build as Model 3 is produced and sells because the ramp for 3 is much greater than for Tesla's other models.

When we work through the numbers (detailed in the model below) our 2018 EPS—which we think is what matters—can get to over $11.00.

Can that actually happen? Who knows. But we think that’s what The Street will start thinking about if Tesla starts to hit their targets this year.

That is of course assuming everything goes right, which we think the stock will reflect this year if Model 3 sales hit or beat targets. Remember, the stock will also reflect optimism because fundamental momentum will force shorts to cover. That 25% short interest will have to step aside, helping the stock launch.

We think exponential earnings growth can easily afford a 30-40 multiple so we can easily see the stock reaching $400-plus.

Will our earnings numbers prove correct? We can’t know, nor do we think it matters this year. All that matters now is the topline momentum. If Model 3 estimates materialize to actual results, the stock can easily reflect $11 earnings “hopes” for next year.

Solar / Energy

We actually love solar (SolarCity is a Tesla subsidiary) and the overall energy potential, although this too is still a show-me. They had huge organic growth, but we think this is still a nascent industry with immense potential.

Buying Tesla, we think, is getting this piece of the business for free because we’ve almost solely been focused on Auto revenues and earnings.

Services

Auto services currently show no profit at Tesla. But services at traditional companies have among the highest margins. This segment also has huge potential.

Conclusion

What’s fun about following this company now is that anything can happen. The potential is huge. The hopes are huge. As Model 3 ramps and jumps the sales numbers, those hopes can start to factor into earnings hopes for next year. That, combined with 25% of the float short, could mean this stock is about to catapult.

Model

Tesla Revenue and Growth Model

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