One prominent Wall Street analyst is questioning how Tesla may be allocating its expenses across different businesses.

Bernstein reiterated its market perform rating for Tesla shares, citing its concerns over the electric car maker’s declining profit margin in its “Services and Other” business segment.

“Tesla reports revenues and gross margins each quarter for its ‘Automotive’ and ‘Services and Other’ segments. Interestingly, ‘Services and Other’ gross margins have steeply plunged in recent quarters,” analyst Toni Sacconaghi said in a note to clients Friday entitled “Services margins are plummeting… does this mean automotive gross margins could be overstated?” “The worry/key question, of course, is whether COGs that should be (or historically have been) booked in the Automotive Segment are now being booked in the ‘Services and Other’ reporting segment, given that investors focus nearly exclusively on Automotive GMs & generally disregard ‘Services and Other’ GMs [gross margins].”

The analyst reaffirmed his $265 price target for Tesla shares, representing 24 percent downside to Thursday’s close.

Sacconaghi noted how Tesla’s gross profit margin for its “Services and Other” segment has declined to a negative 45 percent in its first-quarter 2018 results from a positive 5 percent in its third-quarter 2016 report.

“Specifically, our guesses would be that (1) some portion of warranty expenses are being accrued in ‘Services and Other’, though we note that TSLA’s overall warranty accruals appear generous vs. other manufacturers, and the company states that it includes all warranty expense in its Automotive segment; (2) post warranty work is high and being done for free, resulting in limited Services revenues but escalating COGS; or (3) there is some other incremental service cost associated with Model 3 (given that Service revenues and COGs appeared to diverge at the time of Model 3 ramp),” he said.

Tesla shares declined 3 percent Friday after the report.

When asked for comment, a Tesla spokesperson pointed to sections in the company’s first-quarter shareholder letter that described increased costs in the ‘services and other’ segment was due to a buildout of its mobile service infrastructure. Here is the full part from that letter::

“During Q1, we opened nine new store and service locations, resulting in 339 locations worldwide at the end of the quarter. We continue to expand our service capacity mainly through growth of our electrified Mobile Service fleet. Such service capacity is quicker to deploy, incurs lower upfront and operating costs and has continued to generate significantly higher customer satisfaction rate at an average of 98%. There are about 300 mobile service vehicles in operation today, which is an equivalent of approximately 60 service locations. At the end of Q1, 25% of all service carried out in North America was done without customers having to visit a physical service center.
…
• Service and Other gross loss in Q1 2018 increased to $118 million as a result of the continued growth and maturation in our service infrastructure. Our used car sales had slightly positive gross margin.
• We expect Service and Other losses to reduce substantially in the coming quarters as our service infrastructure becomes significantly more utilized with the ramp of our Model 3 fleet size. There are also substantial revenue generating opportunities as we open our own body shops in 2018 to improve costs of out-of-warranty repairs and as we increase our offering of accessories and merchandise.”