After cratering hard in recent months, Tesla Inc. (TSLA) has picked up speed in just the last month, gaining more than 35%. But the big U-turn is unlikely to last long as much of those gains can be attributed to investor optimism over the electric car maker’s supposed blowout earnings report, the strength of which is now coming under closer scrutiny. UBS analyst Colin Langan argues that Tesla’s earnings received some “unexpected help” in the form of a decrease in the company’s warranty provision and a large inflow from government credits. Skeptical that the company has really turned things around, Langan has a sell rating on the stock and a $190 price target, according to Barron’s.

Tesla’s Stock May Plunge Sharply

 UBS Price Target  Stock Price  Downside
 $190  $341.06  - 44%

Source: Barron’s; as of 4pm EST 11/06

While Tesla did deliver a record number of cars and grew revenues by 70% from the second quarter to report its biggest profit ever, a closer look at the company’s real earnings picture suggests the boost in the company’s stock price is overdone.

What It Means

The largest boost to Tesla’s profits came from the company’s sale of government credits that it earned through the production of clean energy products, such as its electric cars. Those credits can then be sold to other companies that make fewer electric cars and thus need to purchase the credits in order to satisfy regulatory requirements.

In the third quarter, Tesla received as much as $189.5 million in credit revenue, which is considered unusually high and only $52 million of which was reported in the company’s earnings press release on 24 October; the full amount was only later revealed in Tesla’s 10Q regulatory filing last Friday. Langan calculated that Tesla made 77 cents per share from those credit revenues, 26.6% of the company’s total earnings per share of $2.90.

2 Drivers of Tesla Profit Growth

  • Government Credits
  • Decreased Warranty Spending

Source: Barron’s

The other big boost to profits came from a decrease in the amount of money set aside to honor warranty claims. Langan calculated that warranty provisions for the average vehicle had dropped to around $2,200 from $2,900 in the previous quarter. If the provision amount from the previous quarter had been used that would have knocked about $55 million of net income, or 31 cents per share, according to Langan.

Tesla responded by claiming that warranty provisions are lower for the more cheaply-priced Model 3, which made up a larger percentage of Tesla’s third-quarter total vehicle deliveries—68% compared to 50% in the second quarter. While that claim has some merit to it, Tesla also argued that the per-vehicle calculations are inaccurate because the total warranty provision amounts also include solar and energy-storage products. But energy sales amounted to just 6% of sales in the third quarter and cars tend to have more ongoing service needs than the company’s other products.

What’s Next

With a third-quarter earnings report not quite as rosy as initially thought, Elon Musk still has lots of work to do to prove that Tesla’s Model 3 can be one of the market’s mass-produced sedans. Can Tesla be transformed from being a company that burns cash to one that generates it? At least for now, he may want to take advantage of the company’s boosted stock price, selling shares in order to pull in some of that much needed cash.