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Tesla's share price drop is a buying opportunity, says Baird analyst

Baird's Ben Kallo believes that the electric-car maker could 'flip to profitability which could be a major catalyst and transform the narrative'

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The analyst dismissed negative headlines and said the electric-car maker could make a dramatic U-turn

Tesla Inc (NASDAQ: TSLA) may have faced a bumpy ride of late after the electric-car maker’s share price slumped, but one analyst believes it offers a buying opportunity for investors as car sales could drive cash flow.

Ben Kallo, a senior analyst with Baird Equity Research, wrote in a published note that Tesla could “flip to profitability which could be a major catalyst and transform the narrative.”

“We believe TSLA’s ability to generate free cash flow may be underappreciated by some investors," he wrote. "We outline how TSLA could generate significant [free cash flow] through automobile sales alone, based on our back-of-the-envelope analysis."

He added that automobile sales alone could drive "substantial cash flow" even with below-consensus Model 3 sales.

READ: Tesla asks suppliers to return cash to meet its profitability goal

Tesla shares tumbled 4% Monday after the Wall Street Journal published details of a leaked internal memo that showed Tesla had an urgent need for cash and had asked suppliers to return a “meaningful amount of money of its payments since 2016.”

But Kallo dismissed the negative headlines and said that the car company could see a dramatic turnaround despite the “noisy environment,” which is the stock's biggest risk. He believes that it’s not the end of the road for investors as Tesla will likely meet the demand to supply vehicles.

“Bears continue to argue demand is soft and 'take rates' are low, although we think TSLA may provide a positive update on demand trends," he wrote.

Kallo noted that Tesla expected net Model 3 reservations of around 420,000 at the end of the second quarter despite 28,400 total deliveries at that point.

CEO and co-founder Elon Musk tweeted that the company had received 5,000 Model 3 orders in a single week. 

Tesla’s shares were down 0.5% to US$306.96 at midday Thursday.

Written by Belinda Robinson for Proactive Investors

Quick facts: Tesla Inc

Price: 335.89 USD

Market: NASDAQ
Market Cap: $60.54 billion

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