William Blair Downgrades Tesla to Market Perform Amid Tax Credit Elimination

On Monday, William Blair adjusted its rating for Tesla (TSLA.US) from "outperform" to "market perform." This change was prompted by the recent Republican tax and spending bill, which eliminated a $7,500 tax credit for the purchase or lease of new electric vehicles. This policy shift is anticipated to have a significant impact on Tesla's market outlook.

Analyst Jed Dorsheimer highlighted that while the elimination of the tax credit presents a substantial challenge, investors should also consider another aspect of the bill: the reduction in potential fines for automakers under the Corporate Average Fuel Economy (CAFE) standards. This policy change means that market expectations need to be recalibrated. Dorsheimer emphasized that the loss of the $7,500 tax credit could affect demand, but the combined pressure of reduced demand and the risk of over $200 million in regulatory credit profits could be overwhelming for investors.

Dorsheimer further explained that unlike the electric vehicle tax credit, the reduction in regulatory credit income would directly impact Tesla's profitability. This could lead to a comprehensive reassessment of Tesla's performance models by Wall Street analysts. He predicted that while the third quarter might see an increase in Tesla's sales, the fourth quarter could face significant pressure on sales volume and profit margins. The analyst also suggested that decreased factory utilization and price concessions could further weaken Tesla's fourth-quarter earnings.

Additionally, Dorsheimer cautioned that Tesla investors might be growing weary of CEO Elon Musk's political activities, which could divert attention from the company's core operations. This sentiment adds another layer of uncertainty to Tesla's future prospects.