Tesla's 'True' Gross Margins Are Worse Than What The Company Reports

Tesla Motors Inc (NASDAQ: TSLA) shares are down Wednesday morning, partially on the back of a bearish research note from Germany's Berenberg. Analyst Adam Hull is recommending investors sell the stock on poor gross margins and lowered earnings expectations.

The crux of Hull's investment thesis centers on Tesla's profitability. "Excluding government incentives, Tesla's true core gross margin in the luxury large car segment is not the headline 23% in 2015, but perhaps c17% whereas Mercedes and BMW achieve 35-40%," he wrote.

See Also: Sell Tesla On Poor Gross Margin Guidance, Berenberg Warns

Hull added that competition from Porsche and Audi's entries into the pure-battery luxury car segment could be an added pressure point. Tesla's margins were also compared graphically to Mercedes and BMW: The Model S, X and 3 are all projected to be worse than these two peers by 2020.

While lower battery costs as Tesla scales its operations and a strong U.S. dollar should help profitability, Hull said the ending of Tesla's U.S. federal tax credit of $7,500 per car by 2019 and sustained low oil prices are headwinds.

Hull also showed what margins would look like without government-inflated customer incentives.

Of note, the analyst said there were four key risks that could make selling Tesla a bad decision:

1. An extension of the U.S. federal tax credit would keep economics more favorable.

2. Tesla could give Model 3 guidance that explains why the car's cost structure allows it to be more profitable than analysts expect.

3. A weaker dollar would be positive.

4. A higher oil price would be positive for the Model 3.

Tesla shares traded near $170 on Wednesday morning, up from the $150 area it held before earnings but down from the $200 level it traded near a year ago.