Tesla (TSLA) Shares Tank on Mounting Model 3 Doubts

Tesla Stock

Tesla (NASDAQ:TSLA) shares tumbled below $300 in early trading Thursday, July 5, to bring their three-day loss to nearly 17%, as several Wall Street firms remain skeptical about the quality of the carmaker’s Model 3 cars and its ability to meet weekly production targets profitably.

Adding to the stock’s nosedive was a Business Insider (BI) report that said Tesla CEO Elon Musk ordered his engineers to stop putting nearly finished Model 3 cars through a “brake and roll” test before leaving the company’s factory in Fremont, California. The test in question is seen as a critical part of the car’s manufacturing process. Tesla, which said it expects to increase its manufacturing rate to 6,000 Model 3 per week by late next month, told BI that every car goes through “rigorous quality checks, including brake tests.”

“To be extremely clear, we drive every Model 3 on our test track to verify braking, torque, squeal and rattle. There are no exceptions,” Tesla said.

The electric car maker reported on Monday that its Q2/18 deliveries totaled 40,740 vehicles, a number that missed the Street’s consensus expectation of approximately 51,000 vehicles. In a note to clients, JP Morgan’s Ryan Brinkman wrote the company’s success in finally hitting for the last week of the June quarter its 5,000-a-week Model 3 target, was most likely aided by the past practice of unsustainable “burst production,” where it pulls out all the stops to meet a goal that cannot initially be repeated.

Citing Tesla’s lower than expected Q2 delivery numbers and higher costs, Brinkman lowered Tesla’s EPS forecasts saying he now expects a Q2 loss per share of $2.80, compared with his previous estimate for a $2.45 loss per share.

Brinkman rates Tesla ‘underweight’, the equivalent of sell, with a $180 price target.

Bernstein’s Toni Sacconaghi was also skeptical following the reports, saying his firm questions “whether Tesla can really evaluate customer satisfaction yet, when 11,166 Model 3s (likely including a majority of those manufactured on GA4) still remain undelivered in transit.”

Sacconaghi, who believes that Tesla’s issue going into Q2 will be the profitability of the Model 3, also questioned whether the construction of a temporary assembly line in a tent next to the company’s main factory will be maintained indefinitely. If Tesla did not have room in its Fremont plant to build capacity for 5,000 cars a week, how will it manage 10,000, the analyst asked.

Sacconaghi has a “Market Perform” on TSLA and a price target of $265.

At time of writing, Tesla stock was trading down 0.80%/$308. The name has lost 17.80% year-over-year.

References: MW, Reuters

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