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Tesla's decision to cut the price of its popular Model 3 suggests the electric car maker is approaching an "air pocket" in demand, which Morgan Stanley says could weigh on its bottom line and stock price.
Analyst Adam Jonas on Tuesday cut his first-quarter deliveries by 23 percent, reduced his Model 3 average transaction price to $53,000 by the end of the year and slashed his 12-month price target for the stock by more than 8 percent.
He also reduced his 2019 earnings per share estimate to $1.30 from $4.17 and his 2020 estimate to $6.69 from $10.22.
"The company is undergoing multiple transitions with sales momentum slowing, shift to online channels, management changes, setting a foot into China and the early Model Y unveil among other developments," Jonas wrote. "We continue to see the stock as fundamentally overvalued while potentially strategically undervalued."
The analyst's new $260 stock price target implies about 10 percent downside to Tesla shares over the next year from Monday's close at $290.92. Shares fell 3 percent in midday trading Tuesday following the Morgan Stanley note.
The electric car maker said last month that it is lowering the price of its Model 3 by $1,100 thanks to the end of a costly customer referral program. That second price cut to the Model 3 this year brought the cost of its least expensive auto to $42,900, according to the company's website.
Most recently, CEO Elon Musk also sparked controversy when, later in February, he confirmed that the company is shifting its sales to online only and giving drivers up to a week to return their newly purchased vehicles if they aren't satisfied. Tesla explained in a blog post that moving sales online will allow it to market the Model 3 for the long-awaited base model price of $35,000.
"For what many investors believe to be a high growth tech firm, Tesla has made notable moves to cut costs/prices and stimulate orders," Jonas said. "We are not inclined to buy now as we don't believe we'd be compensated for the amount of risk we're taking. The potential longer-term 'resolution' of the Tesla story as we approach nine years after its IPO may require a few more chapters to play out."
Jonas has an equal-weight rating on Tesla shares.