Tesla's stock is falling for two reasons: UBS analyst

Key Points
  • UBS analyst Colin Langan says Tesla's stock is dropping for two reasons: a fatal crash involving a Model X and the company's slow rate of Model 3 production.
  • March 2018 was Tesla's second-worst month, with prices falling 22.4 percent.
  • "Not only do you need to ramp this product, but you are going to have to make sure the quality improves as you ramp it," he says.
Analyst: Tesla will have to raise capital if they don't ramp Model 3 by Q3
Analyst: Tesla will have to raise capital if they don't ramp Model 3 by Q3

Tesla's fatal car crash and the Model 3's slow rate of production is what's behind Tesla's dropping stock, said Colin Langan, a U.S. auto analyst at UBS.

"Not only do you need to ramp this product, but you are going to have to make sure the quality improves as you ramp it," Langan told CNBC on Monday.

"[There are] a lot of challenges ahead. This is really a very important year. This is the future of the company with the Model 3, and it's not starting off very well," Langan said on "Squawk on the Street."

March 2018 was the second-worst month for Tesla shares, narrowly trailing behind December 2010. Its stock price fell 22.4 percent in March, compared with a 2.69 percent decline in the S&P 500 during the same period. On Monday, the shares fell 4 percent more, trading just over $251 — a 36 percent decline since September 2017's all-time high of $389.61.

Last Thursday, the company announced a voluntary recall of 123,000 Model S vehicles, citing an issue with the power steering component. Then on Friday, Tesla revealed a Model X was involved in a fatal crash while the car's Autopilot system was active.

"The Tesla Autopilot crash ... is obviously raising concerns about that system, whether it's fully safe," said Langan. He said having the word "autopilot" as part of the name may not be wise since drivers are still required to have some level of awareness while driving in autopilot mode.

"That raises concerns about liability and that system," he said. "Maybe it needs some form of driver monitoring to ensure that the driver is aware."

Langan said investors are also worried about Model 3 production.

"And on top of it, some of the initial reviews from customers, they're finding issues with this car," he said. "They're going to have to work those out."

Langan said Tesla should increase production of the Model 3 by 2018's third quarter or it will have to raise capital.

Shares of the electric-car maker skyrocketed throughout much of last year, due in large part to anticipation over the Model 3, Tesla's first midpriced sedan. In Tesla's fourth-quarter letter to investors, the company said it would produce 2,500 Model 3 cars per week by the end of its first quarter. It aimed to produce 5,000 a week by the second quarter. The company had initially planned to hit these targets in 2017. But production issues have plagued the company, and it has repeatedly had to delay its production.

"I think the way that they'd like to do it is ramp the Model 3 and then raise the capital for the Model Ys," Langan said. "If they can't get it ramped that puts them in a more challenged position than [Tesla has been] historically."

Langan said Tesla will likely have to raise more than $1 billion.

"The billion will keep them going," he said. "It bides them more time to ramp the Model 3."

On April 1, Elon Musk tweeted an April Fools' joke that Tesla had gone bankrupt.


Langan said the company is far from going bankrupt.

But he said, "I don't think it's something I would be joking about."

Kevin O'Leary, chairman of O'Shares ETF Investments, told CNBC Monday on "Closing Bell" that tech stocks like Tesla are more speculations than they are investments.

"You one day think Tesla will be worth the same as General Motors. Maybe. Maybe not," he said.

He added, "I bought the product. I would never buy the stock."