An Analyst's Key Concern With Tesla's Troublesome Quarter

Wall Street is punishing Tesla Inc TSLA after the company reported lower vehicle deliveries and turned in a third-quarter loss that was greater than projected.

Shares of the electric carmaker were down 7 percent Thursday.

With the Model 3 ramp pushed out a full quarter, production issues still persist surrounding Tesla’s newest model.

In the previous quarter, Elon Musk looked to ease investor concerns surounding Model 3 production.

“I think people should really not have any concerns that we will reach that outcome from a production rate,” Musk previously said of the Model 3.

Musk backtracked on the latest earnings call, downplaying production concerns as a small blip in a long-term plan.

“I think in the grand scheme of things this is a relatively small shift; the Model 3 is a 10-year program, and so we’re talking about a few months out of a 10-year program,” he said.

'I Can See Sort Of A Clear Path To Sunshine' 

Tesla executives’ conviction levels concerning the Model 3’s production stands in stark contrast to the previous quarter, Bernstein analyst Toni Sacconaghi said in a Thursday note. 

“Our key concern with Tesla has long been whether the company can profitably build the Model 3 and do so with sufficient quality. Q3 results reinforced our concerns, particularly on the former,” said Sacconaghi. (See Sacconaghi's track record here.) 

Tesla's guidance for lower auto gross margins in the fourth quarter also was of concern, since the company previously stated that gross margins would improve sequentially in the fourth quarter.

Musk had previously said the Model 3 is in "production hell." Morgan Stanley analyst Adam Jonas went as far as to ask the Tesla CEO: "How hot is it in hell right now? And is it getting hotter or less hot?"

Musk gave a long-winded response.

"Let's say level nine is the worst, OK? Well, we're in level nine. We're now in level eight and I think we're close to exiting level eight. I thought we could probably be more like a level seven by now and I have to tell you, I was really depressed about three or four weeks ago when I realized that we're kind of in level nine, then we got to level eight, now I can see sort of a clear path to sunshine."

With low gross margin visibility low, a high rate of cash burn and production concerns, Sacconaghi said he views Tesla as a "show me story" and lowered his estimates. 

Bernstein maintains a Market-Perform rating on Tesla with a $265 price target.

Related Links:
Tesla Falls After Q3 Loss, Lower Deliveries
Is It Best To Watch The Tesla Story Unfold From The Sidelines? Adam Jonas Weighs In 

Photo courtesy of Tesla.