Tesla: Elazar Downgrades Based On Lower Earnings Estimates

Elazar Advisors downgraded Tesla shares TSLA before the open today citing its estimates that were more than $1.00 below the street for the second quarter.  Elazar went from a Buy to a Neutral rating. Tesla is expected to report earnings after the close on Wednesday.

Earnings Model Lower Based on Model 3 Ramp

While Elazar is excited about the Model 3 ramp and the more-than 400,000 total orders, the near term earnings could be weak as production builds. As Model 3 initially uses its production facilities the underutilization will spread high fixed costs across fewer Model 3 initial deliveries.  That's why Elazar has gross margins moving lower from Q1.

Elazar also expects lower gross margins in Q3 and Q4 as Model 3 production builds because Model 3 being lower priced, could initially have reduced gross margin dollars per unit versus Tesla's higher-priced models.

Revenues are also expected to slow in Q2 since Tesla laps Models S & X growth last year which appears to be slowing on a year-over year basis.  Until the Model 3 hits higher production levels it will likely not make up for the lost contribution to growth rates from Model S & X.

In fact Elon Musk has said that customers have pushed off purchases of S & X thinking Model 3 was the upgrade replacement for S & X.

Elazar Says Tesla Close To Fair Value Here

Elazar's earnings for next year are $8.18. They are using a 40X price-earnings on next year's numbers which gives a target price of $327 which is below the recent close of Tesla shares.

Given that units are pretty much known for 2017, there is more earnings risk than upside. With the Tesla share price at fair value they moved to the sidelines.

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