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Goldman Sachs: Tesla Won’t Come Close to Target, But It’s a ‘Buy’ Anyway

May 19, 2016
Elon Musk wants to sell 500,000 cars in 2018. Goldman Sachs estimates Musk and Tesla will actually sell something closer to 165,000 — maybe, very best case, 368,000 — but that doesn’t alter the current optimism others have for the company. 

Tesla Motors Inc. has set an unrealistic goal for itself and will probably miss 2018 production forecasts by a whopping 66%, according to a report Wednesday by Goldman Sachs Group Inc. Should that dissuade you from buying the stock? Apparently not — the bank’s analysts upgraded their recommendation from “Neutral” to “Buy.”

This is the sort of wild disconnect that Tesla CEO Elon Musk has wrought. By moving up his already-ambitious goal of building 500,000 electric cars in 2020 by a full two years, he’s left Wall Street models in disarray. Virtually no one thinks Musk stands a chance of accomplishing his goal (new ammunition: the company revealed 12,200 Model 3 cancellations yesterday), but if he can even come close, the thinking goes, it could be truly disruptive to the automotive industry.

There are just too many unknowns: How quickly can Musk ramp up production for his recently unveiled Model 3? Will sustained demand be there when he needs it most? How much is all of this going to cost?

The goals that Tesla has set for itself are so daunting that an extra billion dollars or two in capital investments come as little surprise, and “give or take five years” now seems like a reasonable disclaimer with analyst estimates. 

Tesla announced Wednesday that it’s selling another $1.4 billion in stock to help fund the company’s expansion. That’s about $400 million more than Goldman Sachs analyst Patrick Archambault had anticipated in his report earlier in the day, though the difference left the stock little changed. Joseph Spak, an analyst at RBC Capital Markets, said the capital round was about $100 million less than his forecast, though it comes more than a year sooner than expected. “The amount is just right,” wrote Ben Kallo of Robert W. Baird & Co. 

In the Goldman Sachs report, Archambault estimated that Tesla will sell about 165,000 cars in 2018 — a far cry from Musk’s 500,000 forecast. That’s the most likely “base case,” but the bank also laid out a less likely “transformative case” in which Tesla sells 368,000 cars in 2018 — still more than 25% shy of the company’s stated goal. The report was considered a positive outlook for Tesla.  

This all fits into the “Musk Doctrine” philosophy that I laid out last week. I posited that Musk, 44, intentionally sets unrealistic goals in order to motivate the most rapid transformation possible for the auto industry. The reason he moved the 2020 goal forward is that he was dangerously close to actually meeting it — which would be a first for Tesla.

Goldman Sachs joined RBC and Robert Baird in brushing aside the new 2018 goal while simultaneously adjusting their expectations for 2020 to a range that’s more consistent with Musk’s original target — one that until recently had mostly been considered fantasy. 

Wall Street typically prefers companies that regularly outperform, rather than underperform, their forecasts. But analysts are starting to give Musk some room to play: “While management was not clear why goals were set so aggressively,” Archambault wrote, “we view the adjustment as a target aimed at motivating employees and suppliers.”

Fasten your seat belts. The next few years are probably going get even stranger. 

By Tom Randall

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