Tesla Inc (TSLA) stock skidded on Monday after a pair of bearish reports from two analyst firms. Both of them expect the automaker to disappoint on Model 3 deliveries, and one even said company management doesn’t seem confident that they’ve resolved the bottlenecks that have plagued Model 3 production since the beginning. Tesla Inc (TSLA) stock plunged more than 3%, continuing the downtrend it’s been on for about the last month, other than a minor uptick a little over a week ago.
Model 3 orders still on the rise
Dov Gertzulin's DG Capital is having a strong year. According to a copy of the hedge fund's letter to investors of its DG Value Partners Class C strategy, the fund is up 36.4% of the year to the end of June, after a performance of 12.8% in the second quarter. The Class C strategy is Read More
In a note to investors, KeyBanc analyst Brad Erickson said they finally got to drive the Model 3 for the first time during a meeting with Tesla Inc (TSLA)’s investor relations department. He said the car was about as they expected, but he described the interior as “simple,” expressing skepticism that it can attract “the sustainable over-$40K buyer.”
In spite of the anecdotal accounts about Model 3 buyers canceling their orders, he said that the company’s order book for the Model 3 is still growing, which seems to be calming Tesla Inc (TSLA) bulls for now. He also noted that this is a basic fact, “no matter where one stands on demand,” and he feels that Tesla Inc (TSLA) stock could rise on this simple fact, paired with progress in resolving the Model 3 production problems.
In fact, he warned about the potential for a short squeeze in Tesla Inc (TSLA) stock due to “signs of strong Model 3 demand” and “improving production.”
Here’s what Tesla must do to keep its stock going
Erickson reported that Tesla management still expects Model 3 gross margins to turn positive by the second quarter, and he feels that bulls are still waiting for “that breakout quarter” marked by the Model 2 turning positive, Model S and X margins improve, and cash burn slows.
The KeyBanc analyst continues to rate Tesla Inc (TSLA) stock at Sector Weight, as he doesn’t believe the automaker can achieve the gross margin it has said it can on the Model 3. He feels that bulls “are ultimately ascribing too much value from perceived innovative superiority.” He warned that Tesla Inc (TSLA) stock will likely stop rising if the automaker again comes up “far short” of its Model 3 production target, which is 5,000 per week, and its gross margin ramp.
Erickson warned that he has little confidence that Tesla Inc (TSLA) will be able to ramp production to expectations for the first or even second half of the year. However, he also notes that this remains “largely irrelevant” to Tesla Inc (TSLA) stock bulls. He added that the company’s investor relations essentially dodged his attempt to get an update on how production is going, and what’s worse is that he “detected low confidence of no further production bottlenecks.”
“The Company’s goal continues to be maximizing increases to weekly production run rates as fast as possible and then, quite literally, seeing what breaks and fixing it,” he wrote.
Tesla Inc (TSLA)stock is still a Sell: Goldman
Goldman Sachs analyst David Tamberrino offered up an even more bearish view of Tesla Inc (TSLA) stock in his own note today. The automaker is expected to reveal how many vehicles it delivered during the first quarter within the first few days of April, as it typically does this shortly after the end of every quarter. Tamberrino believes the EV maker is on track for yet another delivery miss, based on the company’s “February cadence.” Like Erickson, he believes that although Tesla Inc (TSLA) is delivering more and more Model 3 cars with each new month, it’s still on track to come up “well short” of the consensus. He even expects Tesla Inc (TSLA) to miss its own guidance for Model S and Model X deliveries, which some might see as a major setback.
The automaker guided for 100,000 vehicle deliveries this year, which implies 25,000 per quarter. However, we point out that because the company expects to increase production month by month, it shouldn’t be a surprise if it doesn’t deliver 25,000 vehicles in the first quarter. By the very nature of ramping production, this year could be back-end-loaded in terms of deliveries.
Tamberrino reports that implied weekly production rates according to VIN registrations are falling below the level needed to exit the first quarter producing 2,500 vehicles per week. In fact, he estimates that the quarter-to-date pace is actually down on both a year-over-year and sequential basis. Based on this, he’s now expecting the automaker to report 11,000 Model S deliveries and 11,000 Model X deliveries, which would be a decline from the previous total of 24,000 combined.
He believes the decline is due to the first quarter being seasonally softer and also because fourth-quarter production was impacted by the labor shift toward the Model 3 and a sell-down of inventory. He expects only 7,000 Model 3 cars to be delivered during the first quarter based on VIN registration numbers, which imply that the company is producing about 1,000 of them per week “at times” in the first quarter.
Will Tesla Inc (TSLA)stock break this year?
The Goldman Sachs analyst maintains his Sell rating and six-month price target of $205 per share on Tesla Inc (TSLA) stock. He believes investors won’t be surprised if the company misses expectations for Model 3 deliveries again. Like Erickson, he notes that bulls are just looking past the April update into July, when the company plans to be producing 5,000 Model 3 cars per week.
He believes Tesla Inc (TSLA) stock bulls expect guidance to imply 2,500 Model 3 cars per week. Further, Tamberrino contributed further to the anecdotes about Model 3 buyers cancelling their orders, warning that he sees risk of this due to the growing number of reports about vehicle quality and software problems. He also warned that if it becomes clear that Model 3 buyers are canceling their orders, Tesla Inc (TSLA) stock could come under a lot of pressure.
Tesla Inc (TSLA) stock plunged more than 3% in intraday trading on Monday, falling as low as $310 per share.