Model 3 demand looks very strong into 2019 and beyond: Wedbush Securities

Tesla showroom in a mall

As 2018 edges closer towards its end, Wedbush Securities analyst Dan Ives says demand for Tesla Model 3 sedan “looks very strong into 2019 and beyond.”

In his note to investors, Dan Ives wrote that “underlying drivers for the electric vehicle market are likely to push consumers toward Tesla’s cheapest passenger car.”

According to the analyst, ” Tesla has evolved into one of the most dynamic technology innovators over the last 30 years and, in our opinion, has put itself into an esteemed category of companies such as Apple and Amazon that have revolutionized consumer buying habits and behaviors over the last decade.”

Ives believes strong demand for Model 3 will reduce the need for Tesla to raise capital in the near future. He thinks Tesla will transform the auto industry similar to the way Apple transformed the smartphone industry.

Watch the video to hear Dan Ives opinion on Tesla

The most important view to note here is – Dan Ives thinks Tesla may not need a capital raise in the near term.

Several analysts have spoken about Tesla’s cash position and wall street’s view on Tesla’s near-term funding requirement has quickly gone from – Tesla needs to raise money to stay alive to Tesla needs some extra cash to improve liquidity.

Now, analysts like Dan Ives think Tesla may not need additional funding in the near future.

Ives thinks Tesla turned things around in the third quarter of 2018 when the company reported nearly $311 million in GAAP profits. Tesla had reported quarterly profits just three times in its history. Strong demand for Model 3 will ensure that Tesla’s cash flow grows at a steady clip over the next several quarters.

On September 30th, 2018, Tesla had $2.967 billion cash on hand, but the company had $230 million convertible debt due in November.

If Tesla quickly depletes it’s cash on hand, it will become difficult for the company to pay off the $920 million convertible debt that’s due in March 2019.

Tesla informed bondholders this month that the company plans to use 50% in stock and 50% in cash to settle it’s March debt. But Tesla will be able to exercise the stock-cash option only if Tesla shares stay above the conversion price of $359.87.

If Tesla shares stay lower, the company will have to pay the entire $920 million in cash.

At the time of writing this article, Tesla shares were trading at $300.90, sharply down from the December 13th peak of $376.79 and well below the conversion price of $358.87. Tesla stock has taken a beating in the last few weeks as the broader market sold off due to multiple concerns.

Strong demand for Model 3 in the fourth quarter of 2018 and first quarter of 2019 will help Tesla improve its cash flow.

If margins stabilize during this period due to improving production volume, Tesla will be in a better position to pay of its debt using internally generated cash flow, instead of raising money from the capital markets.

Though Tesla is planning to export Model 3 to Europe in early February 2019 and China deliveries are scheduled for late March or early April, Goldman Sachs expressed concern that demand in Europe may not be enough to offset the demand shortfall in the United States after federal tax credit drops by $3,750.

What else can Tesla do?

Tesla has one great option to stoke Model 3 demand in the United States. The company is yet to start leasing Model 3, which could increase demand in the country.

Leasing is a big part of luxury segment sales all over the world. In the second quarter of 2018, leasing accounted for just 6% Tesla’s car sales.

“Luxury vehicles have always led the charge on the leasing front,”
Scot Hall, executive vice president of said in an interview with “To give you one example, BMW leased more vehicles than it sold in 2017.”

Tesla successfully raised $837 million by selling bonds backed by Model S and Model X leases this month. It marked the second time Tesla has used the asset-backed-securities market to raise funding by selling bonds that are backed by leases on its vehicles.

In January this year, Tesla raised $546 million by backing its bonds with lease payments.

Lease Penetration Rate by Auto Brands

Will Tesla start leasing Model 3 to increase demand in the United States or will the company bank on Europe and China to keep its assembly line running 24/7, please let us know your opinion in the comments section.