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Tesla Inc Stock Stalls As Analyst Questions Demand, Model 3 Ramp

Tesla stock pulled back by about another 2% on Monday after dropping off a cliff on Friday. The shares are on track to close below $300 as analysts have started to pick apart the automaker’s latest 10Q filing, and what they’re reporting certainly doesn’t sound good.

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Rather than simple bottlenecks, one analyst believes Tesla just couldn’t ramp Model 3 production during the third quarter. He also thinks demand for the company’s vehicles in North America is sliding.

Tesla stock stumbles over 10Q revelations

In a note dated Nov. 5, Jefferies analyst Philippe Houchois pointed to the working capital details, currency exchange and demand in North America in the automaker’s 10Q filing for the third quarter. He has an Underperform rating and $240 price target on Tesla stock.

He noted that the automaker invoiced about 24,800 units, a 7% sequential increase, but the average unit revenue fell nearly 4% even though it recorded a 1% currency benefit for the third quarter. He added that auto-related revenue in North America was flat sequentially and down 10% year over year, excluding power generation. China and Norway contributed all of the group’s revenue growth at $100 million each.

He states that this shows flat growth in North America, although one issue with looking at Tesla in this way is the fact that the company is building vehicles to order, which makes it difficult to see exactly where orders are coming from until they’re filled. Customers make a down payment to order their vehicle, but the rest of the revenue isn’t recorded until the vehicle is shipped, making transparency based on this metric nearly impossible.

Level of finished goods didn’t decline much

Perhaps the more concerning findings were the details on the company’s working capital. Inventories were flat at $2.47 billion, and Houchois said he had been expecting the level of finished goods to be much lower because of the de-stocking. He said the finished inventory declined $50 million, while he had been looking for a $200 million decline to bring it to $1.42 billion. He added that because of the deliveries and production disclosures, Model 3 inventories should be at less than $1 million.

He also noted no “unusual move in used cars,” which are also booked in finished inventory. He said that $15 million worth of off-lease used vehicles were added to the company’s inventories, and the $26 million inventory write-down was consistent with the first two quarters of the year. The Jefferies analyst added that raw material inventory grew the most, but he said he can’t allocate between materials for components and batteries.

Concerns about Model 3 production

He reported that work-in-progress was also stable, which he said suggests a slightly different story about Model 3 production than what Tesla management reported. The company has maintained that production “bottlenecks” have prevented it from ramping Model 3 production, particularly due to some parts of the battery assembly process toward the end of the third quarter.

However, Houchois believes the stable work-in-progress suggests that the EV maker wasn’t able to ramp Model 3 production throughout the third quarter. He said that if Tesla had been able to do so, work-in-progress would have been higher. Although he didn’t mention it, there were reports that Tesla fired a large portion of its staff during the third quarter, which seemed like an odd move given the pressure to ramp Model 3 production.

Some workers told media outlets that Model 3 production seemed largely untouched by the mass firings, but if Tesla truly wasn’t able to ramp production during the quarter, this might be one reason why.

Aother reason Model 3 production may not have ramped

A Seeking Alpha contributor simply going by the name “Montana Skeptic” offered up another reason Tesla might not have been able to ramp Model 3 production. He noted that the EV maker said three months ago that it had finished its upgrades to manufacturing and supply chain so it can achieve a Model 3 production rate of 10,000 cars weekly. However, he also alleges that Tesla hasn’t even ordered the equipment needed to reach that level, claiming that the removal of certain language from the EV maker’s 10Q is evidence of this.

He noted that the automaker has removed the language claiming that it will be able to produce 5,000 Model 3 cars a week by the end of this year, which of course is no secret because the company changed its outlook for this in its earnings release. It also removed the timeframe for producing 10,000 Model 3 cars weekly.

He describes Tesla’s claims that it had “completed” its “engineering, manufacturing and supply chain efforts on Model 3 product development” as “highly misleading.” He also believes that the new 10Q language suggests that the automaker will need to spend even more money before it can complete work it said was already done.

The Seeking Alpha contributor also advises against shorting Tesla stock despite his allegations, saying that he “acknowledges the reality that a price can remain irrational longer than you can remain solvent.”

Tesla stock fell as low as $299.01 during regular trading hours on Monday.