Tesla Faces Rough Road Ahead as Tax Credit Elimination Sparks Market Reevaluation

William Blair recently downgraded Tesla's (TSLA.US) stock rating from "Outperform" to "Market Perform." Analyst Jed Dorsheimer noted that the Republican tax and spending bill has eliminated the $7,500 tax credit for new electric vehicle purchases or leases, posing a significant challenge for Tesla. The downgrade reflects the anticipated impact of this policy change on Tesla's market performance.

Dorsheimer highlighted that investors should also consider another aspect of the legislation which reduces potential penalties automakers might face under the Corporate Average Fuel Economy (CAFE) standards. This change necessitates a reevaluation of market expectations. He emphasized that the market's focus should shift due to the elimination of the incentive and its implications on Tesla's future operations.

The analyst pointed out that while the removal of the tax credit may affect demand, the dual pressures of diminished demand and over $2 billion in regulatory credit revenue at risk may become unbearable for investors. He added that a reduction in regulatory credit income, unlike the electric vehicle tax credit, will have a direct impact on profitability. This shift might lead Wall Street to fundamentally reassess Tesla's performance metrics.

Dorsheimer also projected a potential rise in Tesla's third-quarter sales despite the tax credit elimination, yet indicating this could adversely affect fourth-quarter sales and profit margins. He suggested that decreased factory utilization and price concessions might further weaken Tesla's fourth-quarter earnings, posing another challenge for the company.

Furthermore, Dorsheimer remarked on Elon Musk's political activities, warning that Tesla investors might be growing weary of distractions that could impact the company's core business operations. This commentary underscores the complexity of the interplay between legislative changes and corporate governance in influencing shareholder sentiment and market dynamics.