Pacific Crest: Tesla shares worth 10% less, here's why

Published Wed, Jul 6 201612:37 PM EDT

The good news for Tesla Motors , according to Pacific Crest, is that channel checks indicate strong demand for its Model S this year. The bad news is that consumers are gravitating to the cheaper version of this model, which should hurt profit margins for Elon Musk 's electronic carmaker and cause the stock to drop by 10 percent, according to the research firm. "Checks indicate initial demand for Tesla's new, less-expensive car is strong, which would be dilutive to gross margin. We are lowering estimates to reflect this," wrote Pacific Crest's Brad Erickson in a Tuesday note to clients. Pacific Crest slashed the fair value estimate on Tesla to $190 from $212 and reiterated its sector weight rating in a note Tuesday evening. The stock is already down 11 percent this year after missing its second-quarter vehicle delivery target because of production challenges. Investors are also worried about Musk's proposal to combine the company with his other venture SolarCity. The analyst lowered his gross margin forecasts through 2020. He also cut his total delivery estimates for the Model S, X and 3 cars. On the much-hyped Model 3, which will be released in the second half of next year, Erickson said: "We continue to believe that the Model 3 appears overly ambitious and fraught with financial risk, which could limit visibility to a stable path to profitability. Further, in light of recent, persistent production ramp challenges combined with currency, there could be incremental gross-margin headwinds beyond what we have modeled, creating further risk to numbers." The automaker seems to be in the "throes of multiple identity crises," the note said. Tesla's recent move to acquire SolarCity was distracting to its luxury car brand story and may hurt the loyal shareholder base, he added. "What is TSLA all about? Is it about the car being awesome? Is it about making the most cars? Is rooftop solar the missing link that electric car buyers have been missing? No one is quite certain — and neither is the company, in our view," said the firm.

Tesla Motors' mass-market Model 3 electric cars are seen in this handout picture from Tesla Motors on March 31, 2016.

Tesla Motors | Reuters

"Checks indicate initial demand for Tesla's new, less-expensive car is strong, which would be dilutive to gross margin. We are lowering estimates to reflect this," wrote Pacific Crest's Brad Erickson in a Tuesday note to clients.

Pacific Crest slashed the fair value estimate on Tesla to $190 from $212 and reiterated its sector weight rating in a note Tuesday evening. The stock is already down 11 percent this year after missing its second-quarter vehicle delivery target because of production challenges. Investors are also worried about Musk's proposal to combine the company with his other venture SolarCity.