Bernstein: Tesla Model 3 Margins, Build Quality 'Are The Key Investor Controversies'

Critiques of the Model 3 and Tesla Inc TSLA’s consistent production target misses have been at the front of auto investors' minds.

The Rating

Bernstein analysts Toni Sacconaghi Jr. and Max Warburton maintained a Market-Perform rating on Tesla with a $265 price target.

The Thesis

The analysts said they expect production delays and capital raises to dominate Tesla talk for the next two quarters.

"In recent recent quarters, Tesla has repeatedly missed its production targets for the mass-market Model 3; we suspect that these delays have been in part the result of Tesla's overreliance on automation at its Fremont plant," Sacconaghi and Warburton said.

Notably, Tesla announced a temporary plant shutdown Monday to improve automation.

“While further delays would not necessarily ‘make or break’ Tesla, they will invariably exacerbate cash burn,” the analysts said in a Tuesday note. “Another capital raise appears likely, unless Tesla's is able to materially reign in near-term opex or capex spend.”

Beyond the next six months, Model 3 gross margins and build quality "are the key investor controversies," Sacconaghi and Warburton said. Together, they could drive Tesla shares 20 percent to 30 percent outside of their current trading range, by Bernstein’s calculations.

“We remain skeptical on both fronts,” the analysts said “That being said, we have long believed that if Tesla can actually execute on the Model 3, then the company will have substantial room to run due to the rapid growth of the electric vehicle market and a lack of current competition at the Model 3's price point.”