Why This Analyst Remains Cautious On Tesla Despite Model 3, Gigafactory Optimism

• Tesla Motors Inc TSLA shares have declined 14.17 percent over the past three months, touching a low of $206.93 on October 30.
• Pacific Crest’s Brad Erickson has maintained a Sector Weight rating on the company.
• Erickson prefers to maintain a cautious stance, given the softness in Model X reservations, additional risk associated with the production ramp of Model X and its implications on Tesla Motors’ longer term value.

Analyst Brad Erickson mentioned that the cautious stance was maintained despite the fact that “better-than-feared outlook combined with Model 3 and Gigafactory optimism” could alleviate the negative sentiment on the stock.

As expected, Tesla Motors has reduced its 2015 delivery guidance by 1,500 cars at the midpoint, while expecting a sequential decline in R&D for the first time in more than a year, which Erickson sees as positive.

However, Erickson continues to believe that “execution and financial risk surround Model X’s ramp, as evidenced by the company deciding to take middle-seat production in-house after a supplier saw material constraints.”

In case there are additional problems associated with Model X, the company’s cash flows could swing to the negative by “several hundred million.” Such an eventuality could create incremental pressure for Tesla Motors, given that it has already spent $3.7 billion over the last seven quarters.

The revenue and EPS estimates for the company have been lowered to reflect “slightly lower volume and ASP assumptions partially offset by better gross margin from a slower Model X ramp and better expense controls.”