Tesla's Q3 Could Be A Negative Catalyst Amid Unanswered Questions

Third-quarter layoffs, reports of hand assembly and major Model 3 scaling concerns only justified UBS's bearishness on Tesla Inc (NASDAQ: TSLA).

Considering the firm’s previously announced production miss, compounded by a decrease in zero-emission vehicle credits and lower Model S and X margins, UBS expects a third-quarter gross margins hit to cut sequential earnings per share from -$1.33 to -$2.20.

Poor fixed cost absorption ahead of Model 3 ramping will only intensify the losses.

A Cascade Of Misses

Tesla had promised 1,500 Model 3s in the third quarter but turned out a mere 220 amid production bottlenecks.

“Not only does the miss undermine the credibility of future Model 3 targets, but it increases the near term risks,” analyst Colin Langan wrote.

Anticipating Model 3 production misses of 11,000 in 2017, 65,000 in 2018 and 40,000 in 2019, UBS lowered respective EPS estimates from -$5.30 to -$6.40, -$1.60 to -$3.30 and 20 cents to -$1.00 (see Langan's track record here).

Continued delays may yield more long-term losses as the rollout of rival electric vehicles force market-share concession.

Bottom-Line Impact

UBS forecasted $900 million in third-quarter cash burn, comparable to last quarter’s $1 billion and indicative of a burn rate that would sustain Tesla for about four quarters.

Considering the stock’s 50-percent year-to-date run reflective of a successful 2017 production timeline, the firm maintains a Sell rating with a $185 price target.

At the time of publication, Tesla was trading at $318.68.

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Image Credit: Steve Jurvetson [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons