The Wall Street Reaction To Tesla's Underwhelming Quarter

Tesla Inc TSLA's third-quarter earnings report made it clear that the company is at its core a combination of a tech company and a vertically integrated manufacturer, Oppenheimer's Colin Rusch said in a note.

But the company's ability to become a "transformative" technology firm that offers outsized returns should be questioned, Rusch said. (See Rusch's track record here.) 

Any future capital returns are correlated with Tesla's ability to manufacture cost-effectively while maintaining the average selling price of its cars, the analyst said. Now that Tesla has guided its fourth quarter gross margin lower, the company has a "challenging" road ahead to achieve the necessary sales volumes and margins that investors expect.

Tesla could run into difficulties in procuring the necessary rare earth metals for its cars, the analyst said — specifically, Chinese export and environmental policy shifts could prove to be a "gating factor" for any Model 3 ramp.

Oppenehimer is remaining on the sidelines and looking for any positive manufacturing momentum, Rusch said. 

Rusch maintains a Perform rating on Tesla's stock with no assigned price target.

Loup Ventures: Worth The Wait

Former Wall Street analyst-turned-venture capitalist Gene Munster said in a blog post that Tesla's earnings makes it more apparent that a shift toward electric vehicles, autonomy and renewable energy will take longer than previously expected. Patient investors will be rewarded perhaps when Tesla achieves a "vertical production ramp" sometime between 2019 and 2023, Munster said.

Tesla represents "the biggest opportunity in tech" over the next five years, the analyst said. 

Over the longer term, through 2030, Tesla is expected to come closer to its mission statement of "accelerating the global adoption of renewable energy driven by Tesla solar and storage solutions," Munster said.

While Tesla's medium-term and longer-term thesis remain intact, investors have valid reasons to question if the near-term story is broken, as the company's production challenges are now front and center.

"Tesla is struggling to make the Model 3," Munster said.

"Musk gave the reasons on the call, but the bottom line is it's hard to make a car that advanced for that price at scale. The reason why Tesla's manufacturing struggles don't suggest their falling behind is none of the other auto OEMs have started EV projects as ambitious as Model 3. These OEMs have EV offerings, but consumers largely don't want to buy them, so the OEMs don't have to travel through 'manufacturing hell' like Tesla is today."

Elsewhere On The Street

The longer-term case for owning Tesla's stock remains unchanged, Morgan Stanley's Adam Jonas said in a note. Yet there are some "serious concerns" that must be addressed coming years, especially a surge in competition from much larger and more capitalized automakers.

To restore some level of investor confidence, Tesla needs to produce and sell 5,000 Model 3 units per week by the end of the first quarter of 2018 and achieve this target without an increase in cash consumption in order to move the stock "materially higher," Jonas said. 

Tesla's financials in the third quarter were "likely worse than feared," Bernstein's Toni Sacconaghi said in a note. Auto gross margins came in at just 18.7 percent, and free cash flow was negative $1.4 billion.

The company is "clearly struggling" with production issues, and now Tesla's own conviction and possibly vision level on the Model 3 ramp "appeared low," Sacconaghi said.

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