Tesla Stock Dips On Model 3 ‘Production Hell’ Concerns

Electric car maker Tesla (TSLA) delivered its first Model 3 sedans to customers at a launch event on Friday, but many Wall Street analysts remain cautious about the vehicle’s prospects.

XAutoplay: On | OffTesla shares fell 3.5% to close at 323.47 on the stock market today. Investors likely were reacting to comments by Tesla Chief Executive Elon Musk that pointed to a difficult production ramp ahead.

“We are going to be in production hell the next six months, maybe more,” Musk told the crowd of Tesla employees at the company’s Fremont, Calif., factory on Friday. The Model 3 is positioned as the company’s first mass-market vehicle.

Musk “sounds increasingly squeamish about the production ramp” for the Model 3, Bernstein analyst Toni Sacconaghi said in a note to clients Monday.

“The rubber now hits the road, and the fundamental questions remain unanswered,” Sacconaghi said. Those questions include whether Tesla can meet its aggressive Model 3 production ramp-up and whether the car will cannibalize sales of Tesla’s higher-end vehicles, especially the Model S.

Sacconaghi reiterated his market perform rating on Tesla stock with a price target of 265.

Tesla is releasing two versions of the Model 3: a standard version and a long-range version.

The standard Model 3 will start at $ 35,000 and is expected to have 220 miles of battery range, go zero to 60 miles per hour in 5.6 seconds, and reach a top speed of 130 mph. The long-range version will start at $ 44,000, have 310 miles of range, a 5.1-second acceleration from 0 to 60 mph, and a top speed of 140 mph.

IBD’S TAKE: Tesla has been a big stock winner in recent years, but it currently has a so-so IBD Composite Rating of 74 out of 99 and is ranked No. 4 out of the 15 stocks in the Auto Manufacturers group. To see what the leading auto stocks are today and how they and Tesla stack up vs. objective criteria, go to IBD Stock Checkup.

In a report Saturday, KeyBanc Capital Markets analyst Brad Erickson reiterated his market perform rating on Tesla and said the stock’s fair value is in the low 200s.

Tesla also is set to report its second-quarter results after the market close on Wednesday.

“We remain buyers (of Tesla stock) after attending the Model 3 release event, but are cautious headed into Q2 results,” Baird analyst Ben Kallo said in a note to clients Monday. “Model 3 specifications indicate the car could outperform competitors at a competitive price, and production will now be a focus as Tesla targets positive gross margins on the vehicle in Q4 2017.”

But Kallo expects Tesla shares to be under pressure after the company announces results.

Analysts expect Tesla to report a loss of $ 1.80 a share on sales of $ 2.55 billion, compared with a loss of $ 1.61 a share on sales of $ 1.27 billion in the year-earlier period.

For the current quarter, Wall Street is modeling Tesla to lose $ 1.52 a share on sales of $ 2.81 billion.

The introduction of the Model 3 will take several months and Tesla shares could see positive catalysts from vehicle reviews and production updates, Kallo said.

Tesla’s Musk said the company has over half a million reservations for the Model 3. He says the company is focused on reaching an annual production rate of 500,000 units next year.

“Tesla has discussed production of about 500,000 vehicles in 2018, although we continue to be conservative in our estimates (we model 310,000 total vehicles),” he said.


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