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Tesla: Questions About Model 3 Profitability as Production Rises

Is Tesla on the verge of a financial breakthrough—or about to stall?

Is Tesla on the verge of a financial breakthrough—or about to stall?

That’s what Morgan Stanley analysts wondered in a Tuesday note as they pared back earnings estimates and cut their price target on the Barron’s Next 50 stock to $291, right around current levels, from $376.

“The number one issue at the heart of the Tesla investment debate is whether the company is currently operating at a low level of utilization of a very large industrial complex, where incremental revenue can bring large incremental gross margins and improvement of cash consumption, or the next 50-100% of growth in revenue brings forth other calls on cash and does not materially move the company in the direction of a fully self-funding existence,” they wrote.

The analysts called the shares “near fair value” with a “balanced risk-reward,” maintaining an “equal-weight” rating. Of the 20 analyst share price targets tracked by FactSet, half are above current levels; the mean is slightly above yesterday’s close.

Most of the reason for the pared-back target, the analysts wrote, was concerns about Model 3 profitability, rather than output.

The change comes as Electrek reported on a company memo saying Tesla (TSLA) is poised to top Model 3 production numbers of 500 a day. The company has pledged 5,000 a week by the end of Q2 as it moves toward profitability.

“It is our view that the challenges in ramping up Model 3 production reflect fundamental issues of vehicle design, manufacturing process, and automation levels that can weigh against the profitability of the vehicle,” they wrote. “Movements in raw material prices and [foreign exchange rates] add further headwinds.”

“Tesla management believes the Model 3’s margin performance below its 25% target level will be temporary, whereas we believe this headwind is more structural,” they wrote, lowering their overall auto gross margin forecast from 34% to 27%.

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