Needham Holds Tesla On Manufacturing Problems, Long-Term Drag On Gross Margins

Tesla Inc TSLA finally earned a Consumer Reports recommendation for its Model 3, but Street analysis suggests it may still have difficulty selling

That is, it may take too long developing a product to sell.

The Rating

Needham analysts Rajvindra Gill and Edwin Mok initiated coverage with a Hold rating.

The Thesis

Needham identifies a “meaningful advantage” in Tesla’s neural networks and ability to update software wirelessly ― but those bullish factors are offset by a number of negatives, the analysts said in the Friday initiation note. 

Tesla will not produce the targeted 5,000 Model 3s per week until the second quarter of 2019, according to Needham's forecast — particularly as research indicates ongoing manufacturing problems with battery cells, module assembly and factory automation lines.

“If the company does manage to hit its production targets, we suspect it will be sacrificing margins and profitability, as we believe the yields on the battery packs are still low and will take substantial time to ramp,” Gill and Mok said in the note. 

By their assessment, positive gross margins on Model 3s will be difficult to achieve by the fourth quarter and Tesla will not record positive free cash flow until 2020.

In the meantime, Tesla is seen to concede its tech advantages in electric vehicles as competitors improve their materials; cooling systems; batteries and driver-assistance systems; and its energy business weighs heavily on margins.

“In our view, the company is in a race against time,” the analysts said. 

Price Action

Tesla shares initially popped premarket and were trading up 1.3 percent at $288.44 at the time of publication Friday. 

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Photo courtesy of Tesla.