Tesla must quickly improve its Model 3 production rate if it wants to raise critically needed funds from investors at a decent price, according to Morgan Stanley.
The firm reiterated its equal weight rating on Tesla shares. The note came a day after the stock declined 8 percent on a negative analyst report and the National Transportation Safety Board's announcement that it sent investigators to look into the fatal crash of a Tesla car last week. Moody's also downgraded Tesla's credit ratings after the close Tuesday
"A sharp drop in Tesla's share price in part reflects questions on Model 3 ramp … an event that directly impacts both the company's near-term cash needs and ability to potentially access the market for capital," analyst Adam Jonas wrote in a note to clients Wednesday. "A lower share price begets a lower share price… For a company widely expected to continue to fund its strategy through external capital raises, a fall in the share price can take on a self-fulfilling nature that further exacerbates the volatility of the share price."
The company's shares declined 7.8 percent Wednesday. Tesla stock is now down by more than 30 percent from its high in September 2017.
Jonas reiterated his $379 price target for Tesla shares, representing 36 percent upside to Tuesday's close.
He said the company needs to accelerate its rate of Model 3 production if it wants to raise funds at an attractive price for the company.
"The precise timing of when Tesla can achieve a 2,500/week and then a 5,000/week production run-rate for its mass market sedan can make the difference between whether Tesla is potentially raising capital from a position of weakness at a price near our $175 bear case or whether it can access capital from a position of strength with a stock price near our $561 bull case," the analyst wrote.
Nevertheless, Jonas believes Tesla shares are attractive at the current level and recommends investors buy on any further declines.
"We think that we are looking at one of the buying opportunities that many investors have been waiting for," he wrote. "We'd use further weakness from here as an opportunity to build an Equal-weight position in the stock … We see Tesla as modestly undervalued with very high risk."
Tesla did not immediately respond to a request for comment.