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Pro Analysis

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

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

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.