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Tesla Faces a High Hurdle (Update 1)

Updated from 8:48 a.m. EST to provide additional analyst comments in fourth paragraph.

NEW YORK ( TheStreet) -- Tesla Motors (TSLA - Get Report) is scheduled to report the automaker's third-quarter earnings after the close of markets this afternoon. With shares up 417% this year, and seemingly possessing all of the world's momentum behind its Model S vehicles, Tesla has a high hurdle to cross.

Since shares reached a high of $194.50 in October, Tesla has pulled back on some public relations nightmares -- a case of faulty acceleration and then a couple of fires-- along with a general sentiment that the stock had run-up too-much-too-soon.

Going into today's earnings release, short interest has dropped markedly, according to the Nasdaq. The day-to-cover ratio is down to 1.55 as of Oct. 15, way down from 22.9 in March, and just slightly lower than the 1.61 ahead of Tesla's last earnings report on Aug. 8.

Morgan Stanley analyst Adam Jonas, who rates shares "overweight" with a $149 price target, notes that Tesla's earnings could actual prove to be a stabilizing event rather than an event mired in volatility.

"For perhaps the first time in its young history, we expect TSLA's 3Q earnings will be a catalyst for stability instead of volatility," Jonas wrote in his note. "While expectations remain high, we think that TSLA is on track to achieve a 25% GM by 4Q and that supply constraints may limit potential for volume surprise."

Despite the obstacles, Tesla has managed to navigate the course as demand for the Model S continues to be exceptionally high. One line item to watch will be the company's gross margin level, which was at 22%, or 13% excluding Zero Emmissions Vehicles (ZEV) credits.

Wedbush Securities analyst Craig Irwin, who rates shares "outperform" with a $240 price target, says the company's target of 25% ex credits is perhaps the most important factor to monitor.

"We see incremental visibility for Tesla achieving 4Q13 gross margin targets of 25% excluding credits as the most important item on the call, where experience with the Roadster supports good confidence," Irwin wrote in a research note. "Over the production of the Roadster, there was a $45k per vehicle improvement (excluding credits) in production costs, mostly on assembly efficiency. This affords Tesla an execution roadmap for the Model S, where the company now has greater control."

On the second-quarter earnings call, CEO Elon Musk noted that Tesla is having a hard time keeping up with demand. "We have production constraints, not demand constraint," Musk said. He went on to say, "90% of our suppliers are able to ramp up and 5% have some difficulty and 4% have a lot of difficulty and 1% just can't and so we have got to replace those or in-source those items. You can't give people a car that's 99% complete, unfortunately, and there are several thousands unique parts in the car."
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