Street is not impressed by Tesla’s Model 3 milestone; stock plunges 7% on negative notes, brake test report

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Several Wall Street firms are playing down Tesla’s Model 3 production milestone, remaining skeptical over the carmaker’s finances and demand trends.

Tesla said Monday it reached its one-week production goal of 5,000 Model 3 cars for the last week of the June quarter. But the company fell short on its second-quarter deliveries by posting 40,740 vehicles delivered versus the Wall Street consensus expectation of approximately 51,000.

Tesla shares fell 7.2 percent Tuesday. The company’s shares hit the lows of the day on a report it decided to skip a “brake-and-roll” testing step in the manufacturing of its Model 3 vehicles. Tesla did eliminate the brake test because it deemed it to be redundant.

“Every car we build goes through rigorous quality checks and must meet exacting specifications, including brake tests. To be extremely clear, we drive *every* Model 3 on our test track to verify braking, torque, squeal and rattle. There are no exceptions,” the company told CNBC.

The carmaker’s shares declined 2.3 percent on Monday after opening up 5 percent at the beginning of that day’s session.

Reuters also reported on Tuesdaythat Tesla shifted workers from other departments including the Model S production line to meet its Model 3 production target.

Goldman Sachs was not impressed with the company’s announcement and reiterated its sell rating for Tesla shares, noting net Model 3 reservations declined to 420,000 from 455,000 last year.

“Model 3 deliveries did miss our bearish estimates and we see the incremental color on Model 3 net reservations (where the company showed its first declining data point) as incrementally negative,” analyst David Tamberrino said in a note to clients Tuesday.

Tamberrino reiterated his $195 six-month price target for Tesla shares, representing 42 percent downside to Monday’s close.

One Wall Street analyst believes Tesla shares will drop further when the company reports its second-quarter earnings.

“Given the softer overall trend to deliveries and implied negative read-across to 2Q earnings and cash flow, we expect a negative reaction in TSLA shares,” J.P. Morgan analyst Ryan Brinkman said a note to clients Tuesday.

Brinkman reiterated his underweight rating and $180 price target for the carmaker’s shares.

In similar fashion, Citi Research reaffirmed its “neutral/high risk” rating Tesla shares, saying Monday’s production announcement doesn’t significantly change the company’s finances.

“We don’t believe today’s update will settle bull/bear debates about sustainable production/demand, FCF generating ability and the risks tied to Tesla’s balance sheet position,” analyst Itay Michaeli said in a note to clients Monday.

Michaeli reaffirmed his $313 price target for Tesla shares.

To be sure, not everyone on Wall Street is negative on Tesla’s prospects. Nomura Instinet reiterated its buy rating and $450 price target for Tesla shares on Monday.

“Tesla hit its production target of 5,000 Model 3’s in the final week of the quarter, which is an important milestone that we believe reestablishes some credibility and positions the company for profitability in the second half of the year,” analyst Romit Shah said in a note. “That said, we continue to expect TSLA shares to be volatile near term; we see current weakness as an opportunity to further accumulate shares.”

The company’s shares are up 8 percent this year through Monday versus the S&P 500’s 2 percent gain.

When asked for comment, a Tesla spokesperson referred to the company’s second-quarter vehicle production press release, which said the electric car maker produced 5,031 Model 3 vehicles in the last seven days of the quarter, while also producing 1,913 Model S and X vehicles in the same period.

— CNBC’s Michael Bloom contributed to this story.

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