The hand-wringing over Tesla’s ability to generate profits on the Model 3 is overblown, according to Berenberg.

The firm raised its price target for Tesla, predicting the electric car maker will be able to meet its 25 percent gross profit margin forecast for the Model 3. Berenberg also reiterated its buy rating for the stock.

“Model 3 gross margin to positively surprise,” analyst Alexander Haissl said in a note to clients Friday. “The widespread assumption that Model 3 margins can be directly inferred from Model S/X is inherently and almost totally flawed. Substantial gains from lower labour content, as well as capital and material use efficiencies, should allow Tesla to comfortably achieve a margin above 25% throughout the product cycle.”

The analyst raised his price target for Tesla shares to $500 from $470, representing 81 percent upside to Friday’s close. Tesla shares rose 2 percent in premarket trading Monday.

Haissl said the Model 3 has significantly lower material costs versus the Model S since it uses a less-expensive electric motor and takes away features such as an air suspension and aluminum body. He also estimates the labor content is about $1,000 per car for the Model 3 versus more than $4,000 for the Model S due to “higher levels of automation and lower in-sourced content.”

The analyst played down recent fears that Tesla will move away from a more modernized manufacturing process.

“We think reports that Tesla is reversing its automated manufacturing strategy over-exaggerated the real changes to the production system,” he wrote. “We expect Tesla to remain the battery technology leader, as traditional OEMs have shown little effort to commit meaningful capital into battery technology.”

Tesla’s shares are down 11.1 percent year to date through Friday compared with the S&P 500’s 1.5 percent return. They were up 1.5 percent in Monday’s premarket.

— CNBC’s Michael Bloom contributed to this story.