This 2024 rule change could send Tesla stock crashing

Tesla(TSLA 0.49%) could be a thing of the past.

The electric vehicle (EV) leader has cut the prices of its vehicles several times this year to remain the industry leader and boost sales. In the third quarter, the average selling price of all Tesla vehicles fell by about $9,000 to just over $45,000.

CEO Elon Musk spent much of the third-quarter earnings call discussing how important it is for Tesla to be price competitive. Musk explained that most car buyers use some form of financing, so the company has lowered prices on its vehicles to counter higher interest rates and prevent increases in monthly payments.

Musk also said that “there is very significant price elasticity in the automotive sector and Tesla,” which may surprise some investors who would assume that Tesla would be able to charge higher prices because of the perception that the company have better technology or a better brand.

However, Tesla may face another obstacle in its fight for price parity with mainstream vehicles in 2024.

A Tesla Model 3 on a winter road.

Image source: Tesla.

The tax incentives for Tesla are getting smaller and smaller

Musk also acknowledged the $7,500 electric vehicle tax credit on the call, but said it wasn’t as big of an incentive as it might seem, as it would be a burden for some Tesla buyers to wait until tax season wait to claim the credit.

However, Tesla is now warning customers on its website that some of its vehicles are no longer eligible for the full $7,500 credit. According to Tesla, the Model 3 rear-wheel drive (RWD) and Model 3 long-range options will only receive $3,750 in tax credits instead of the full $7,500 credit because some of their components come from China.

The Department of Energy changed the tax credit in early December, and the two Tesla Model 3 trim levels that will be affected by the change are Tesla’s cheapest, meaning they could scare away some of Tesla’s most price-sensitive customers.

Tesla is using the rule change to incentivize purchases of these vehicles before the end of 2023, but this announcement also appears to be an admission that the reduced incentive could pose a challenge to sales of these cars.

Will the change hurt Tesla?

The tax incentive change will only affect a minority of Tesla buyers since most Tesla car sales come from outside the US. Additionally, the Model Y outsells the Model 3, even though the Model 3 is the second best-selling vehicle.

The tax incentive change also only applies to two of the three trim levels of the Model 3. The most expensive Performance trim of the Model 3 is not affected. It’s unclear what percentage of Model 3 sales are for the affected trim levels, but it’s safe to assume that about 10% of Tesla sales are for the Model 3 RWD and Long Range trims sold in the U.S., as about 40% Tesla’s sales come from the USA and the Model 3 is the second most popular model in the USA

Taking Musk’s comments at face value, it appears that a significant percentage of affected Model 3s could become too expensive for Tesla customers. Before credit, the Model 3 RWD starts at $38,990, with the Long Range version starting at $45,990. The nearly $4,000 increase in vehicle price is likely to deter some customers.

While a loss of a few percentage points in sales may not seem like a big deal, Tesla stock is perfectly valued and the company is currently struggling with slowing sales growth and falling profits, as well as signs that the broader electric vehicle market is weakening.

In other words, the tax credit change comes at a bad time for Tesla and will likely add to its challenges. Given its high valuation and overall macroeconomic pressures, this could lead to a sharp sell-off in Tesla stock next year.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in Tesla and recommends them. The Motley Fool has a disclosure policy.