Tesla Model 3 cancellation risk causes analyst to put brakes on outlook

The possibility of an increased amount of Tesla Model 3 customer cancellations caused one investment firm to lower its outlook on the stock on Thursday.

Needham & Company downgraded the stock to underperform from hold, saying in a research note that the stock is overvalued “despite falling 16% from its June 2017 peak.” Analyst Rajvindra Gill cited the expiration of customer credits and increased competition from competitors, as well as high manufacturing costs and margin pressure, as reasons for the bearish outlook.

“Based on our checks, refunds are outpacing deposits as cancellations accelerate,” Gill wrote. “In August '17, TSLA cited a refund rate of 12%. Almost a year later, we believe it has doubled and outpaced deposits.”

Needham also said it expected Model S and X sales to remain “lackluster.”

A Tesla spokesperson refuted claims that Model 3 cancellations are outpacing deposits, stating that, as of the second quarter, net reservations were at about 420,000. The company also said it had delivered more than 28,300 Model 3 vehicles so far, and expected orders to grow faster than its production rate moving forward.

Last week, Tesla announced that the tax credit for new vehicle purchases would begin to phase out in January. The full credit is only available while a manufacturer maintains sales below 200,000 – which means Tesla hit that sales threshold this month.

As of Jan. 1, the federal tax credit for anyone who purchases a new Model S, X or 3 will be reduced to $3,750 from $7,500. As of July 1, the credit will be reduced even further to $1,875. As of 2020, the incentive will be entirely phased out.

Hundreds of customers are on the waiting list for the lower-priced Model 3 sedan, which becomes available in 2019, and the reduction of the tax credit could impact some buyers’ ability to afford the vehicle.