Tesla Inc (NASDAQ:TSLA) has been downgraded to a 'hold' rating by Jefferies amid concerns about the electric vehicle (EV) manufacturer's ability to maintain its superior margins, or 'profit edge'.
While the investment bank believes that while Tesla's growth strategy over margin has its logic, it also questions whether the company's profit edge was structural or simply a timing difference.
In addition, Jefferies feels that the company's relative price aggression is not supportive of a high multiple investment case while unfolding.
It suggested that the auto industry's structurally low margin "may prevail over Tesla in the end, since it is harder to challenge a large established industry than create a new one".
As a result of these concerns, it has cut its rating to pending a reset of performance and possibly governance, with a price target of $185. Jefferies has also reduced its estimates for the next three years by 20-25%, taking its price target to $185.
While Tesla is stepping up its transition to a world of sustainable energy, Jefferies believes that the process is chaotic and may slow down EV penetration and accelerate profit normalization for the industry.
Tesla's Q1 results did not validate demand elasticity offsetting lower prices, and cost progress may take longer to materialize. Despite this, Jefferies believes that the investment case remains 'fascinating'.