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Will Tesla Ever Earn a Profit? 1 Analyst Thinks So

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Tesla (NASDAQ: TSLA) is catching a lot of flak from the media this morning. CEO Elon Musk is planning to raise $1.5 billion in new cash from a bond issue, money it will need to build and deliver the 455,000 Model 3 sedans it now has on pre-order. But pointing to Tesla's rocketing valuation and $362 stock price -- up 57% so far this year -- The Wall Street Journal calls Tesla's capital raise a "missed opportunity." Instead of taking on debt, says the Journal, Tesla should be converting shares into cash before the stock price falls.

Not all analysts agree. Here are three things you need to know about that.

Image source: Tesla.

Argus upgrades Tesla

In fact, just this morning, Argus Research upgraded shares of Tesla, and raised its target price on Tesla stock. As explained in a write-up on StreetInsider.com (subscription required), Argus believes that far from falling, Tesla stock is destined to rise as high as $444 a share over the next 12 months.

Why Argus has ardor for Tesla

What makes Argus so optimistic about Tesla? That's no great secret: It's the Model 3.

Argus says Model 3 order activity has been strong. In fact, reading the same research report, TheFly.com highlights a comment from Argus, to the effect that "Tesla has been getting 1,800 Model 3 orders per day without any advertising or marketing."

Now, on the one hand, all of these orders are increasing Tesla's "labor and overhead costs," which is one reason Tesla needs to raise some extra cash. That being said, Argus believes that Tesla's labor and overhead costs will "diminish over the course of next year."

Argus is predicting that Tesla will achieve 25% gross margin on its sales in 2018 and losses will subside, and by 2019, Tesla will finally reach "full-year profitability."

Getting from here to there

Reaching that profitability, however, will still require investors to remain patient through a series of unprofitable quarters -- bad news that will jibe poorly with what are likely to be numerous quarterly reports containing good news about Tesla sales, resulting in absolutely no Tesla profits.

How long will investors have to wait for Tesla to report a profit? Argus thinks at least "breakeven" profits will arrive two quarters sooner than previously expected. Turning to consensus estimates, Wall Street is looking for Tesla to lose:

  • $2.77 per share during this current third fiscal quarter of 2017.
  • $2.37 more in Q4 2017.
  • $1.80 in Q1 2018.
  • $1.48 in Q2 2018.
  • $0.81 in Q3 2018.
  • $0.30 in Q4 2018.
  • $0.10 in Q1 2019.
  • And a final $0.06 in Q2 2019.

(All of which data comes to us courtesy of the friendly data crunchers at S&P Global Market Intelligence.) Granted, there's a pronounced downward trend in the amount of money Tesla is expected to lose per quarter all through this time span. Still, it's only in Q3 2019 -- two full years from now -- that most analysts expect Tesla to begin earning profits.

The most important thing: How patient can you be?

Once those profits turn positive, though, Tesla is expected to quickly begin erasing its earlier losses. Consensus expectations for the second half of 2019 see Tesla earning about $0.75 per share in H2 2019 -- more than enough to offset the company's H1 2019 losses and turn 2019 into a profitable year.

After that, profits should pick up quite nicely. While you'll want to take any predictions this far out with a few shakers of salt, Wall Street as a whole predicts Tesla will earn $8.89 per share in 2020, and grow that 40% to $12.45 per share in 2021.

Granted, this means that at $363 and change, Tesla stock today is selling for 29 times what it might earn four years from now. That being said, projections for 2022 earnings suggest at least one more year of near-40% growth in Tesla's future ($17.33 per share). And this suggests that Wall Street may be expecting Tesla to grow earnings at sustained, tech-stock-like rates, for some time after it becomes profitable. How long might Tesla be able to maintain such a growth rate?

Apparently, long enough that Musk thinks it's smarter to raise cash today by selling debt than by sacrificing any more Tesla stock.

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Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.