Tesla (TSLA) stock price is down over 2% in pre-market trading after a top analyst downgraded Tesla to ‘sell’ as he sees the Model 3 cancellation rate increasing for a series of reasons.

Update: Telsa has denied the analyst’s claim since the publication of this article.

Analyst Rajvindra Gill at Needham issued a new note to clients today in which he made the claim about the Model 3 cancellation rate:

“Based on our checks, refunds are outpacing deposits as cancellations accelerate. The reasons are varied: extended wait times, the expiration of the $7,500 credit, and unavailability of the $35k base model.”

Gill continued:

“In August ’17, TSLA cited a refund rate of 12%. Almost a year later, we believe it has doubled and outpaced deposits. Model 3 wait times are currently 4-12 months and with base model not available until mid-2019, consumers could wait until 2020,”

The analyst believes that Tesla’s capital structure is “unsustainable” despite the company’s claims that it will be profitable in the second half of the year and won’t need to raise capital.

Rajvindra Gill is one of the top-ranked analysts on TipRanks currently holding #35 out of 4,841 analysts with a success rate of 69% and an average return of 21.2%. He doesn’t have a long story of recommendations on Tesla and most recently was rating it a “hold” before this new note:

Update: Tesla denies that Model 3 cancellations are outpacing new orders in a comment to Electrek.

Electrek’s Take

Aside from Gill’s high rating, I don’t know why people would believe him about the Model 3 cancellation rate because the reasons he is giving are not great in my opinion.

Saying that the cancellation rate “has doubled and outpaced deposits” is completely the contrary of what Tesla is saying now that they are starting test drives.

The automaker claims that new orders will outpace the production rate as it starts to deploy its Model 3 test fleet.

To be fair, I was skeptical of that claim too even though I have no doubt that test drives will result in a significant demand boost, but I am a lot more skeptical of cancellations outpacing new orders.

I agree with Gill that the loss of the federal tax credit is going to hurt, but that’s going to be in 6 months. In the meantime, it will actually help Tesla get new orders for the vehicles that they can deliver in the next 6 months as buyers want to secure the full credit.

Gill is talking about cancellations outpacing new orders now and not in 6 months.

Lastly, the analyst seems to be misreporting Model 3 wait times which are not “currently 4-12 months and with base model not available until mid-2019.”

For the markets where the Model 3 has launched (US and Canada), wait times are 1 to 4 months for the 3 available configurations and 6 to 9 months for the base versions.

In conclusion, I don’t know where Gill is coming from with this information, but the market is certainly listening to him.

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