Expectations for Tesla Inc (NASDAQ:TSLA)’s first quarter are low, and that might be a good thing.

The Rating

Jefferies analyst Philippe Houchois upgraded Tesla to Hold with a $250 price target.

The Thesis

For Jefferies, the bad news is largely baked in. Houchois said he expects Tesla to miss Q1 targets and consensus estimates, and maintained estimates of a $500-million operating loss and $700 million in free cash flow.

But Tesla has a shot at redemption, the analyst said. (See Houchois' track record here.)

“We consider a small possibility of Tesla releasing supportive data this week, but mainly high probability that management and the board will take more drastic action on guidance and funding to restore credibility,” Houchois said in a Monday note. “At the current share price, either would be positive, including higher-than-consensus dilution from raising capital if it credibly derisked the Model 3 ramp up.”

Tesla needs $2.5 billion to $3 billion in fresh equity to fund the ramp, and while the company can refinance debt, the declining stock price and maturity of two convertible notes in the next 12 months are seen to provide downside risk, the analyst said. At the same time, Jefferies said Panasonic’s Gigafactory investment might affect the asset’s status as potential collateral.

Heading into the quarterly update, the Jefferies analyst is watching for Model 3 cancellations versus new orders, which the firm considers the most critical metric.

Price Action

At the time of publication, Tesla shares were trading down nearly 7 percent around $248.

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Photo courtesy of Tesla.