Tesla: An Unexpected Loser In The GOP's Tax Plan

Tesla Inc (NASDAQ: TSLA) took a hit last week when House Republicans proposed to eliminate the $7,500 electric vehicle federal tax credit.

The Street fears the subsidy’s loss could deter cost-conscious Tesla buyers, and some see the risk compounding the increased cash burn and Model 3 production concerns already surrounding Tesla. 

The Analyst

Bernstein’s Toni Sacconaghi covers technology stocks including Hewlett Packard Enterprise Co (NYSE: HPE), International Business Machines Corp. (NYSE: IBM) and Apple Inc. (NASDAQ: AAPL). 

The Rating

Sacconaghi maintains a Market Perform rating on Tesla with a $265 price target. (See Sacconaghi's track record here.) 

The Thesis

The proposed tax repeal is a merely “modest” negative, the analyst said. While it may prompt a 15-percent drop in global Model 3 unit sales and result in long-term negative elasticity in domestic EV demand, Tesla’s “substantial order backlog ensures that its cash flow will likely remain unaffected through at least 2018.”

Tesla could benefit from near-term hikes in Model S and X demand and strong long-term EV market momentum, the Bernstein analyst said. 

“Paradoxically, the repeal might strengthen Tesla's relative competitive position,” Sacconaghi said. 

Price Action

Nov. 2 reports of the GOP plan prompted a marginal drop in Tesla’s stock. At least, marginal relative to the previous day’s earnings-driven crash. The firm’s bottom-line miss catalyzed a 3-percent daily selloff.

The stock fell again Monday after Tesla was named in Monday’s Paradise Papers as operating Dutch limited partnerships to offshore funds and limit its tax burden.

At the time of publication, Tesla was trading at $301.49, down 8.7 percent from its pre-earnings rate.

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Photo courtesy of Tesla.