What's going on, Tesla?

In a note published on Friday, June 22, Bernstein analysts questioned whether or not Tesla is overstating its automotive gross margins.

Bernstein has Tesla Inc.'s (TSLA) - Get Report target price at $265. It's rated as a perform. 

"We struggle to find evidence as to why the COGS [cost of goods sold] of Services and Maintenance have increased exponentially (up $266 million in [fiscal year] FY '17 vs. up $66 million in FY '16), with no commensurate increase in revenues," stated Bernstein in the note. 

Investors tend to focus heavily on the automotive gross margins as compared to the services and other margins, meaning that—if Tesla was moving the costs around—then investors might not know to look in the services and others margin.

"The worry/key question, of course, is whether COGS that should be (or historically have been) booked in the Automotive Segment are now being booked in the "Services and Other" reporting segment, given that investors focus nearly exclusively on Automative GM's and generally disregard 'Services and Other' GMs," said the note.

Further into the report, Bernstein breaks down the possibilities for the numbers listed above.

"So what might be going on? We hesitate to speculate but worry whether some of the costs that should be (or historically have been) booked in the Automotive Segment may be reported in the 'Services and Other' segment instead. Specifically, our guesses would be that (1) some portion of warranty expenses are being accrued in 'Services and Other,' though we note that TSLA's overall warranty accruals appear generous vs. other manufacturers, and the company states that it includes all warranty expense in its Automotive segment; (2) post warranty work is high and being done for free, resulting in limited Services revenues but escalating COGS; or (3) there is some other incremental service cost associated with Model 3 (given that Service revenues and COGS appeared to diverge at the time of the Model 3 ramp)," said Bernstein. 

In an email to TheStreet, Tesla said that it addressed service costs in its first quarter of 2018 shareholder letter. The company hopes to become profitable by the third or fourth quarters of 2018.

The company said, "If we execute according to our plans, we will at least achieve positive net income excluding non-cash stock based compensation in Q3 and Q4 and we expect to also achieve full GAAP profitability in each of these quarters. This is primarily based on our ability to reach Model 3 production volume of 5,000 units per week and to grow Model 3 gross margin from slightly negative in Q1 2018 to close to breakeven in Q2 and then to highly positive in Q3 and Q4. Ultimately, the growth of Model 3 and the profit associated with it will help us accelerate the transition to sustainable energy even faster."

In afternoon trading, Tesla fell 3.4% to $335 a share.