Tesla (NASDAQ:TSLA) remains undervalued despite its astronomical current valuation, according to broker Jefferies.
The broker upped its price target on the electric car maker to US$365 from US$360 as it suggests higher margins, through cost efficiencies, could raise earnings [EBITDA] by 4%.
Key to this is the Model 3, Tesla’s mass produced and affordable electric car, due for release in 2017.
It will cost around US$35,000, half of the current Model S, and cutting costs, particularly to its battery, is “critical” says the broker.
Currently, the battery pack cost for Tesla’s Model S is around US$250 per kilo-watt hour (kWh), and the Model 3 is expected to be around the same.
This represents some 20% of the average selling price.
But Jefferies reckons this and be more than halved by 2020 to under US$125 (around 12% of the average selling price) through changes to the battery cell and the benefits from its well-documented gigafactory coming online.
Chemical changes in the battery, including using more lithium and silicone among other changes, could reduce the cell cost of the battery by 30%.
The gigafactory, due to begin production early next year, could drive down production costs by 70% through supply chain optimization and economies of scale.
"With a Model 3 base price of US$35,000, reducing battery pack cost is critical to its economic viability,” Jefferies said.
Shares in Tesla were 3.2% lower in pre-market trading to US$219.