Tesla Pricing Concerns Have Led To A Rash Of Downgrades

Tesla is losing favor with Wall Street. According to FactSet, Jefferies analyst Philippe Houchois downgraded Tesla shares to Hold this week and reduced his price objective to $185 from $230, the seventh drop since February.

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Price reduction and price elasticity are a source of worry. Tesla has dropped the price of electric vehicles numerous times this year to promote growth. Tesla gained market share in the first quarter as a result of the reduction. This is a plus, and Barron's has been bullish on Tesla's long-term prospects, but investors are concerned about price. "However fascinating the investment case remains, relative price aggression is not supportive of a high-multiple investment case."

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Houchois cites many compelling reasons for price cuts, including increased EV penetration and market dominance. However, holding stock during a price war is difficult. Then there's pricing elasticity, which is the change in demand caused by a price shift. 

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Elasticity is one if prices fall 10% and demand grows 10%. However, elasticity varies over time and at different price levels. More price cuts eventually have less of an impact on sales, which he fears for Tesla.

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Analysts praised Tesla's early price decreases, but their doubts rose as more cuts were implemented. Four analysts downgraded the stock from Buy to Hold in March, before the results. After earning money, two more people joined them, followed by Houchois. Over that time, the average price target for Tesla fell from $202 to $189. 

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Less than half of the analysts covering Tesla rate the stock as Buy, down from over 65% at the start of 2023. The S&P 500 Buy ratio is 58% on average. Shares began the year at $123, dropped to $102 in early January, almost $218 a few weeks later, and are now trading around $160.

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