3 Optimistic Assumptions For Model 3 Underpinning Tesla's Valuation

The Tesla Inc (NASDAQ: TSLA) Model 3 may be the most hyped product release in recent memory. With Tesla shares already up 59.6 percent in 2017, investors must ask themselves the million-dollar question: will the Model 3 actually live up to the hype?

According to UBS analyst Colin Langan, the answer is a resounding no.

In a new report, Langan said expectations for the Model 3 are extremely high ahead of the scheduled media event on July 28. He noted that the media’s reaction to the Model 3 and its specifications will be extremely important.

Features and price point will be critical to the Model 3 gaining market approval. Langan expects a price point with options in the low $40,000 range, comparable to the BMW 3-Series and the Mercedes C-Class.

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Langan said Tesla’s recent run-up in share price is related to the company hitting its Model 3 production targets. At Tesla’s current share price, UBS estimates that the market is pricing in roughly 2 million units sales per year for Tesla within a decade.

“This makes three optimistic assumptions - TSLA can reach its mid-teens operating margin target (vs. ~7% sector average), only has 3% annual dilution, & can still trade at 25x earnings in 10 years,” Langan explained.

He pointed out that all major global manufacturers have planned electric vehicle launches scheduled by the end of 2020.

UBS has lowered its full year EPS estimate for Tesla from a $1.32 loss to a $1.80 loss due to its 3,000-delivery shortfall in the second quarter. The firm maintains a Sell rating and $185 price target for the stock.