Tesla Inc Stock Tumbles On Model 3 Reality Check

Tesla Inc (NASDAQ:TSLA) stock skidded on Wednesday after an analyst poured cold water on the bullish sentiment that Model 3 deliveries are finally falling in line with expectations. In fact, he slashed his fourth-quarter delivery estimate to one-third of what he was previously projecting, triggering a selloff in Tesla stock that couldn’t be halted by two tax-related gifts extended to the automaker.

Tesla stock skids on latest Model 3 news

In a note to investors on Wednesday, KeyBanc analyst Brad Erickson said he has slashed his Model 3 delivery estimate for the fourth quarter from 15,000 to only 5,000 following his recent checks. He said that amount may be too low for the sell-side case for Tesla stock, although it probably is “acceptable” for the buy-side argument.

He based his Model 3 delivery estimate on conversations with sales staff at 18 Tesla stores in the U.S. The KeyBanc team found some California locations with about 12 deliveries per week, with the average being around 10. Outside California, they found stores averaging closer to six deliveries per week. His checks also suggest that Model S and Model X deliveries are tracking about as management expected when they guided for second-half deliveries to be higher than the 47,000 vehicles that were delivered in the first half of the year.

Jury will still be out on Model 3 margins

Erickson emphasized that his new Model 3 delivery estimate isn’t at a “make or break” level, as he feels that “a few thousand units shy of expectations” probably won’t be seen as “too negatively” by some investors. He believes bulls are more focused on whether the cars are being produced with few defects and if consumer reviews continue to be favorable.

He also thinks that judgment day for the “true Model 3 gross margin” hasn’t arrived yet since it isn’t expected to ramp fully until mid-2018 because of all the production problems Tesla has experienced so far. As a result, he believes it will be “a few more quarters” before any harsh judgment is doled out if the gross margin disappoints.

He believes that eventually, investors will realize how important the Model S and Model X are for Tesla’s gross margins, and he doesn’t expect the margin to ramp as expected. He remains cautious on demand for the Model 3 at the price point that could be required in order to achieve the company’s targeted gross margin.

Tax news not enough to support Tesla stock

In intraday trading on Wednesday, Tesla stock slid by as much as 1.67% to $311.99 following KeyBanc’s report, continuing the downward trend observed since the middle of this month.

Investors are so focused on the Model 3 at this point that even positive tax-related news isn’t enough to support Tesla stock today. The new U.S. tax reform bill leaves in place the $7,500 tax credit for electric vehicle buyers. This is huge for Tesla and especially the Model 3, the luxury auto brand’s first EV targeted at the mass market, which consists of buyers who are much more price conscious than luxury car buyers.

The clock has been ticking on that tax incentive for Tesla buyers, and the version of the tax bill signed by President Trump will keep the clock running just as it has been. Those who receive the full credit will get $7,500, but in the quarter after Tesla delivers its 200,000^th vehicle in the U.S., the tax credit will begin the phase-out period and start shrinking until it disappears.

The other bit of good tax news that could have supported Tesla stock on any other day came from China which maintained the tax exemption on new energy vehicles, which had been slated to expire at the end of this year. Given the size of the Chinese auto market, this news is also huge for Tesla.

However, right now the Model 3 is what’s driving Tesla stock, so that reality check from KeyBanc outweighs the tax-related news flow right now.

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