Tesla Inc (NASDAQ:TSLA)
It would appear that investors on Wall Street are losing faith in Tesla stock. Price reductions are the reason for this, and the “elasticity” of prices is a new fear.
On Tuesday evening, a Jefferies analyst by the name of Philippe Houchois downgraded Tesla stock (NASDAQ:TSLA) from Buy to Hold, and he reduced his price target for the stock from $230 to $185 per share.
During Wednesday’s trading at midday, the price of a share of Tesla fell 2.8%, landing at $156.17. Both the S&P 500 SPX –0.44% and the Nasdaq Composite COMP +0.46% have seen gains, with the S&P 500 seeing 0.2% and the Nasdaq Composite seeing 1.1%.
The issue is with the prices. In 2023, Tesla reduced the prices of its vehicles across the globe on multiple occasions in order to assist with the company’s expansion. It appears as though the cuts were successful, as Tesla increased its market share from the previous quarter to the first quarter of this year.
That is a point in the stock’s favor; however, the lack of clarity regarding pricing is currently obscuring any potential advantages.
According to what Houchois wrote in his downgrade report, “however fascinating the investment case remains, relative price aggression is not supportive of a high multiple investment case while unfolding,”
He pointed out that there are valid reasons to use lower pricing in order to pursue higher volumes, including faster EV penetration and, of course, increasing market share. One of these reasons is to pursue higher volumes. However, maintaining ownership of the stock during a period of price competition can be challenging. Houchois is also concerned that the demand bump that resulted from lower prices did not show sufficient pricing “elasticity.”
A change in demand that is brought about by a change in price is referred to as pricing elasticity. For example, the elasticity would be equal to one if prices were to fall by 10% while demand rose by 10% at the same time. The issue is that elasticity shifts not only over time but also in response to different price points. He is concerned that Tesla will eventually reach a point where further price cuts will have less of an effect on overall sales.
Tesla Stock Price Rating
In a report that was published on Tuesday, Bernstein analyst Toni Sacconaghi also brought up the elasticity issue. However, he did not lower Tesla’s rating in any way. He has already given the stock a rating of Sell and has set a price target of $150 for it.
Recently, the share price has taken a beating. Since Tesla reported earnings on Monday, the stock had fallen approximately 11% heading into trading on Wednesday.
The cut that Houchois received was the third one since the earnings report on April 19. According to FactSet, this marks the seventh time since the end of February that the recommendation of Buy has been lowered. The initial price cuts made by Tesla were met with praise from analysts; however, analysts have become increasingly concerned that additional price cuts signal a demand issue.
In the days following the release of earnings, analysts William Stein of Truist and Matt Portillo of Tudor Pickering both rated the company’s stock as underperforming. Both of these price reductions were significantly influenced by Tesla’s pricing strategy.
According to what Stein wrote, “Pricing trends… diminish the value of its core automotive business.” Both his rating, which is now at Hold rather than Buy, and his price target, which is now at $154 rather than $245, were lowered. Portillo lowered his price objective from $127 to $116 and lowered his rating from Hold to Sell.
Following the release of the earnings, “we didn’t get much comfort in terms of where automotive gross margins and operating margins might stabilize while the price cut strategy is largely predicated on capturing longer-term value through an enhanced fleet of vehicles and a successful autonomous breakthrough,” wrote Portillo.
Elon Musk, CEO of Tesla, is of the opinion that the company can make additional profits on its automobiles, even after the owners have taken possession of them, by providing the customers with software for autonomous driving. The revolution that Portillo was referring to was the development of systems that actually make it possible for vehicles to operate themselves.
Before the earnings were made public in March, four market analysts—Rod Lache of Wolfe Research, Jennifer Liang of KGI Securities, Seth Goldstein of Morningstar, and Adrian Yanoshik of Berenberg—downgraded their recommendations on the stock from Buy to Hold.
Yanoshik wrote in his downgrade report that “tactical price changes reflect cost-leadership strategy,” and he added that “fears of a price war” have been accepted by investors. This will have a negative impact on sentiment regarding Tesla stock.
Yahoshik increased his price target for the stock from $200 to $210 per share. Both Liang and Goldstein decreased theirs, with Liang bringing hers down to $172 from $196 and Goldstein bringing his down to $215 from $225. There is no predetermined price goal for Lache. Having a Hold rating from Lache indicates that investors should expect Tesla stock to perform similarly to the market.
During that time period, the consensus price target among analysts dropped from $202 to approximately $189.
Due to recent developments, just under half of the analysts who cover Tesla stock currently rate shares of the company as Buy. About 58% of the stocks in the S&P 500 are rated as Buy by market analysts on average. Prior to the year 2023, the Buy-rating ratio for Tesla stock was approximately 65%.
This year, Tesla’s stock has been on a roller coaster ride due to the wild swings in the company’s pricing strategy, its profit margins, and the sentiment of analysts. The share price began 2023 at approximately $123, dropped to approximately $102 in early January, rebounded to almost $218 a few weeks later, and has since fallen more than 25% from its high point in February.
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