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Tesla Inc (TSLA) Earnings Preview: Model 3 “Blemishes” Pose A Risk To Stock

Tesla Inc (TSLA) is set to release its Q4 2017 earnings report after closing bell tonight. Analysts are expecting the Tesla Inc (TSLA) earnings release to show non-GAAP losses of $3.15 per share on $3.3 billion in sales. In the year-ago quarter, the automaker reported adjusted losses of 69 cents per share on $2.3 billion in revenue.

tesla earnings q4 2017 tesla stock model 3 production
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On the Tesla Inc (TSLA) earnings call, it’s a guarantee that analysts and investors will be looking for hints about how Model 3 production is going. Unfortunately, one analyst reported this morning that the production quality on the Model 3 is not great, and this poses yet another risk for Tesla Inc (TSLA) stock.

Model 3 still the focus for Tesla Inc (TSLA) earnings

In a preview note on Tesla Inc (TSLA) earnings for Q4 2017, KeyBanc analyst Brad Erickson revealed the results of his latest channel checks. His team spoke with 16 different Tesla Inc (TSLA) sales centers in the U.S. and found “few signs of implied progress vs. the implied delivery run rates at the end of the quarter.”

He said that half of the centers they spoke with have yet only see a few Model 3 deliveries in the months since they began. Most also said that most of the deliveries are still to employees. He added that although some California stores are seeing up to 12 Model 3 deliveries per week, he thinks most are seeing only six to 10. Outside Tesla Inc (TSLA)’s home state, the number tends to be less than five per week.

Because of the feedback he received from the Tesla Inc (TSLA) sales channel, he slashed his Q1 2018 Model 3 delivery estimate from 13,000 to 8,500. However, he warned that the actual result may end up being in the 5,000 range. Still, he does expect progress to be made in the rest of Q1. For 2018, he’s now expecting Tesla Inc (TSLA) to delivery only 98,500 Model 3 cars, down from 108,000. He pegs the gross margin on the car at 11.7%, cut from his previous estimate of 14.5%. This pushed his other 2018 estimates lower as well.

Tesla Inc (TSLA) may be having quality issues with Model 3

Erickson also said that many Tesla Inc (TSLA) salespeople are “openly acknowledging” that Tesla Inc (TSLA) is having problems with production. In fact, he said that many Model 3 cars are arriving at sales centers “with slight blemishes of fit and finish.” The problems with the cars are minor enough that Tesla Inc (TSLA) service centers are able to handle the repairs, but Erickson thought it was important to mention the issues because of how often he heard this.

He doesn’t expect Tesla Inc (TSLA) to reach its target of breakeven gross margins because of the preannounced Q4 miss, but he does expect “a few hundred basis points of gross margin headwind” due to the required repairs. He also emphasized that the production quality of the Model 3 must improve, so he will continue to look for signs of customer response to the car. He warned that this finding poses potential risk to Tesla Inc (TSLA) stock and the company’s story because demand depends almost entirely on the strength of its brand and the perceived quality of its cars.

He continues to rate Tesla Inc (TSLA) stock at Sector Weight going into the Q4 2017 earnings report. Tesla Inc (TSLA) stock ticked up by less than 1% to $336.20 ahead of opening bell this morning.