MORGAN STANLEY: Tesla whiffing on Model 3 production means its time to buy (TSLA)

Elon Musk

Tesla's stock dropped after the company missed its production numbers for the new Model 3 car, but Morgan Stanley is saying to buy the dip.

"Most auto launches have hiccups, and Tesla is no exception," Adam Jonas, an analyst at Morgan Stanley, said in a note to clients. "In our opinion, quality and attractiveness of early production is far more important than the quantity delivered,"

Tesla only made 260 Model 3 sedans in the third quarter when it was hoping for 1,500 in September alone. Tesla is hoping to ramp to 20,000 vehicles a month by the end of the year, but Jonas isn't so certain. His prediction is for 120,000 vehicles in all of 2018, which is an average of about 10,000 a month, and he says uncertainty is high.

Tesla told investors the disappointing numbers are due to "bottlenecks" in production, and the company should be able to correct those bottlenecks.

Jonas believes Tesla when it says it can fix the bottlenecks. He said that 2017 was more of a trial period for Tesla in his eyes, and the real test comes next year as the company will have to produce the cars in much higher numbers to meet the demand of the approximately 450,000 preorders.

Jonas also pointed out that Tesla isn't a one-car company. Delivery numbers for the Model S and Model X vehicles were about 10% higher than he expected, and full-year guidance suggested deliveries in the fourth quarter will be similarly above expectations.

Jonas said Tesla isn't likely to be cash-flow positive until 2019, which falls in line with other Wall Street analysts. Jefferies initiated its coverage recently, predicting a profitable company likely won't appear until 2020.

Other automakers are also coming closer to releasing competitive products to Tesla's all-electric semi-autonomous cars, Jonas said. The next 6-12 months should be full of announcements and increasing competition for Tesla.

Tesla was down around 1.75% after the poor production numbers but is up 56.27% this year.