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Baird Says Buy The Recent Weakness In Tesla Motors, Sees 68% Upside in Shares

TSLA | September 2, 2016

Baird has urged investors to buy the recent weakness in Tesla Motors Inc (NASDAQ: TSLA), as it reiterated its Outperform rating and price target of $338, implying a potential upside of 68 percent over recent close.

Headwinds, Tailwinds

Investors are concerned over Tesla's S-4 filing that calls for about $422 million in payments to holders of Tesla's 2018 convertible senior notes, expected to be paid in the third quarter. Baird pointed out that these conversion notices are not new, as they were disclosed in Tesla's 10-Q published in early August.

Despite these expected payments, Tesla has indicated that it has adequate liquidity through the end of the current fiscal year.

"Headlines have been dominated by concerns over TSLA's need for a capital raise and near-term liquidity constraints, but these are not new developments. We believe that recent pressure is overblown and would be buyers on any weakness," analyst Ben Kallo wrote in a note.

In addition, Kallo noted that despite news and other analysts' reports, he do not believe SolarCity Corp (NASDAQ: SCTY) was going bankrupt prior to the proposed Tesla acquisition.

"We believe that the bankruptcy and bailout calls are overdone, as SCTY had the ability to take steps to tap equity markets, even if it was at a discount to where shares were trading," Kallo highlighted.

On the liquidity front, the analyst continued that the disclosure on the recent S-4 form that Tesla is planning to raise additional funds through a debt or equity offer is not new. Kallo expects the capital raise to occur in the fourth quarter of 2016 or the first quarter of 2017.

Further, a $400 million undervaluation by Lazard is not expected to impact the SolarCity deal.

"We remain confident that a better offer will not materialize, and that the merger will go through," Kallo elaborated.

Other Catalysts

Kallo noted that the upcoming catalysts for Tesla include its third quarter report and the expiration of SCTY's go-shop period on September 14 that would provide more clarity on the acquisition.

"We look to the Q3 call for more information about the battery factory and updates around Model 3 ramping," Kallo added.

Other catalysts include:

"Ramp of Model X production.
"Additional details about the Model III.
"Expansion of production capacity for both TSLA auto and TSLA Energy.
"Construction milestones at TSLA's cell/battery factory."

Further, the analyst expects Model III should outperform competitors, providing a fully electric vehicle at a competitive price.

At time of writing, shares of Tesla were up 0.54 percent to $201.85.

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