03:09 PM EST, 03/06/2024 (MT Newswires) -- Tesla's (TSLA) exposure to decelerating demand for electric vehicles may eat into its 2024 earnings and sharply reduce free cash flow, Morgan Stanley said in a note.

The brokerage lowered its price target on the EV maker to $320 from $345 and lowered its 2024 adjusted per-share earnings target to $1.51 from $2.04. The consensus is for a much stronger normalized EPS of $3.15 this year, according to a Capital IQ survey.

Morgan Stanley lowered its full-year revenue estimate to $101.94 billion from $105.96 billion. The Capital IQ-polled consensus is for revenue of $110.3 billion in the ongoing year. Shares of Tesla fell 1.9% in late afternoon trade. The brokerage rates the company's stock at an overweight rating.

EV demand continues to decelerate despite continued price cuts, while fleets have dumped EVs in favor of hybrid vehicles in order to meet customer demand, according to the report. If there was ever a time for Tesla to potentially post a negative GAAP earnings before interest and taxes in the auto business, it may be this year, Morgan Stanley wrote in the note emailed Wednesday.

Tesla's first-half results will likely miss profitability expectations, with GAAP operating profit margins in the 2% to 3% range implying underlying EV manufacturing margins likely in the red, the report showed. Lower volume and more severe price cuts are expected to reduce Tesla's auto gross margin to around 11.4% in 2024, compared with Morgan Stanley's prior view of 13.2%.

The brokerage cut its 2024 free cash flow estimate to $86 million from $1.01 billion, assuming Tesla spends "just over" $10 billion on capital expenditures this year. Its unit volume estimate was lowered to under 2 million units, implying around 10% year-over-year growth, compared with 2.08 million units in Morgan Stanley's prior model.

Morgan Stanley cut its Model 3 volume estimate to 731,186 units from a prior view of 768,016 vehicles and its Model Y target to 1.18 million from 1.22 million.

"In response to falling profitability, we anticipate Tesla will pull back on price cuts to defend margins and cash flow," the brokerage said.

Price: 177.12, Change: -3.62, Percent Change: -2.01