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Downgrades drag Tesla stock below $1,000

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Tesla stock fell back below $1,000 a share after a pair of downgrades, although it is rising again today after falling on Friday. Stock indices are in the red, so the fact that Tesla stock is rising is definitely a good sign for bears. Despite the downgrades, analysts from both firms are still positive on Tesla stock.

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Pricing risk in Tesla stock downgrade

In a note on Friday, Morgan Stanley analyst Adam Jonas downgraded Tesla stock from Equal-weight to Underweight and trimmed his price target from $680 to $650 a share. He believes the automaker deserves most of its market cap as it the global leader in electric vehicles. He noted that at a time when many automakers are laying off workers and cutting capacity, Tesla has been expanding its capacity to meet increased long-term demand for its vehicles.

However, he also believes that the run which carried Tesla stock up over $1,000 doesn't reflect several emerging risks, many of which are long term and could materially impact fundamentals. One of the risks he sees is short-term, while the other two are long-term.

Tesla demand

The short-term risk that drove his Tesla stock downgrade is demand and pricing. He notes that the company must keep navigating challenges in connection with restarting production at its Fremont factory and dealing with vehicle markets that aren't as strong as they were before the pandemic.

Tesla has cut prices in China and the U.S. In China, the Model 3's price was cut about 10% to bring it under RMB300,000 so it can be in the revised domestic electric vehicle subsidy. In the U.S., the automaker cut the price of the Model S and Model X by about 6% and the price of the Model 3 by about $2,000.

Tesla stock downgrade for China risks

The two long-term risks are China and competition in the tech space. Perhaps the biggest risk is trade relations between the U.S. and China. Jonas believes Tesla stock might "trade in sympathy with the market's reading of the situation week in and week out."

He believes anything that weighs on trade relations with China could disproportionately affect Tesla versus other stocks. He added that China has been driving his expectation that Tesla shipments there peak at just under 500,000 units by 2027 and decline from there. He estimates that every 100,000 China units are worth about $1 billion of EBITDA and $50 to $70 per share in Tesla stock.

Data from the China Passenger Car Association revealed this month that deliveries of Tesla's China-made Model 3 in China reached a record 11,095 units last month. China Automotive Information Net reveals that 11,364 Tesla vehicles made in China were registered there.

Jonas' concern about technology hinges on Amazon's interest in autonomous vehicle maker Zoox. He said other tech names could enter the industry and compete with Tesla at some point.

Price target at $950

While Morgan Stanley's price target for Tesla stock is quite low, Goldman Sachs analyst Mark Delaney raised his 12-month price target to $950 in conjunction with his downgrade to Neutral. He is still positive on the automaker's long-term outlook.

He noted that Tesla has been an expensive stock for quite some time, and valuation has expanded for the entire market. He also believes the bar for Tesla's fundamentals is higher than it is for other stocks with challenging near-term results because of Tesla's premium multiple and historical volatility.

He added that recent data points for Tesla have been mixed as the company cut its prices but compressed lead times for the Model Y despite reports of production challenges. Delaney would become more positive on Tesla stock if he had more confidence in the near- to intermediate-term fundamental trajectory or if valuation became more attractive.

He does expect Tesla to continue holding its leading position in electric vehicles with solid margins.

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