(Reuters) - Shares of billionaire Elon Musk's Tesla Inc TSLA.O fell in volatile trading on Monday as investors pocketed some profits after the company announced it had hit a production milestone for its Model 3 cars.
Tesla shares were last down 2.5 percent at $334.23 in brisk trading after the company said it met a long-elusive weekly production target of 5,000 Model 3 cars, reaffirmed its financial guidance and committed to increase production to 6,000 per week by late August.
Earlier in the session the heavily shorted stock had risen as high as $364.78, up 6.4 percent. Trading volume was 1.5 times the 10-day moving average.
But the pullback in shares showed that investors were not won over by the news as they eyed lower-than-expected delivery numbers, the financial impact of ramping up production and the quality of the cars being built.
While UBS analyst Colin Langan said there was some relief the company hit the target, he noted that second-quarter vehicle deliveries of 40,740 missed his expectation for 51,000 and the consensus estimate of 49,000.
He also questioned whether the company could keep up the faster production and its profit outlook.
“We’re very worried about quality and if you read the reports online there’s significant quality issues. They still haven’t proven they can produce these profitably. The math is very challenging in getting to a sustained profit,” said Langan.
While Tesla forecast positive net income for the third and fourth quarters, Langan was less optimistic, saying he does not expect a net profit in the third quarter and that a fourth-quarter net profit could be temporary as the average price of the cars sold will likely come down in 2019.
Tesla stock rose 10 percent on June 6 when Musk said the company was on track to hit the 5,000 weekly target. The stock continued to rise for much of June, ending trading on Friday 17.8 percent higher than the closing price on June 5.
“The stock had already priced in hitting the target,” said Langan.
David Kudla, founder and chief executive of Mainstay Capital Management in Grand Blanc, Michigan, said Monday’s news did not change his recommendation to short Tesla stock. Selling shares short is a bet that the share price will fall
“The push to meet these self-imposed targets makes one question what cost was incurred to build these cars and how was quality adversely impacted,” said Kudla, who is personally short the stock.
“Whether somebody is short at $361 or $300 they’re going to be fine. In a month second-quarter earnings will come out and that’s when we’ll see how financials are impacted,” he said.
As of Friday’s close, 34.83 million Tesla shares or 27.5 percent of the shares available for trading were sold short, according Ihor Dusaniwsky, managing director at S3 Partners a financial analytics firm.
Short sellers had not covered their positions ahead of Monday’s announcement, according to Dusaniwsky who said it was too soon to report on Monday’s short activity.
“I’m surprised there wasn’t more activity long and short on Friday,” he said. “You wonder are traders maxed out on risk on Tesla. At a certain point you’re gorged. You can’t take another bite.”
Reporting by Sinéad Carew in New York; Editing by Alden Bentley and Matthew Lewis
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