Updated from 10:14 a.m. to include comments from Tesla fourth quarter earnings call in the fifth paragraph.
CLSA analyst Andrew Fung downgraded shares to underperform from outperform, cutting his price target to $220 on concerns that the Model X, Tesla's upcoming SUV, will have lower margins than expected. The Model X is slated to be introduced in the third quarter of this year. Fung said the lower margins, coupled with "Tesla's recent execution issues and together with investor concerns around demand, could limit this year's upside potential."
Shares of Tesla dropped 2.8% to $196.11 in trading Wednesday after the downgrade.
Fung expects Model X gross margins to be about 3% in the third quarter with deliveries of about 500 units, and 15% in the fourth quarter on 1,500 units. As a result, he cut 2015 and 2016 earnings per share estimates to 42 cents and $3.40, respectively. Wall Street's consensus estimate is for 72 cents and $4.11 a share for 2015 and 206.
On Tesla's fourth quarter earnings call in February, CEO Elon Musk said he expects Model X production to really ramp up in 2016. "Assuming people like the car, that's where you start to see, yes, I don't know, 40,000, 30,000 40,000 at least," Musk said. "Maybe, 50,000, let's call it 30,000 to 50,000 Xs next year."
Despite the near-term concerns about the Model X and execution issues, Fung believes the picture for the Palo Alto, Calif.-based company is bright in the longer-term, highlighting China and the company's potential in energy storage as opportunities.