Wall Street gets bearish on Tesla as growth fears intensify
Wells Fargo downgraded Tesla's rating to "underweight."
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The backstory: Over the past decade, big names like Tesla, BYD, Rivian, General Motors and Volvo have fiercely competed in the electric vehicle (EV) market. Tesla, in particular, has been a major player. But the company has recently faced growing challenges. A global drop in EV demand, sparked by a price war, caused Tesla's market value to plummet by almost US$200 billion in the first month of 2024. This drop was a surprise, especially since Tesla was considered part of the elite "Magnificent Seven" stocks alongside giants like Microsoft, Apple, Nvidia and Amazon.
More recently: In January, Tesla warned of a big slowdown in sales growth for this year. CEO Elon Musk said it's hard to ramp up production for a new car, and the firm needs better manufacturing tech. This change in focus made Tesla expect a "notably lower" sales growth, especially after seeing a drop in fourth-quarter profit. In the first two days of trading this month, Tesla's market value plummeted by nearly US$70 billion, mainly due to a sharp drop in shipments from its China factory. In February, the company shipped only 60,365 vehicles, the fewest in over a year.
The development: Wall Street has been less optimistic about Tesla lately. For example, Wells Fargo downgraded Tesla's rating to "underweight." The bank is concerned that Tesla's price cuts aren't boosting demand for EVs as much as expected. This, along with a drop in Tesla's share price target from US$200 to US$120, shows growing doubts about the EV maker's future. Colin Langan, an analyst at Wells Fargo, said Tesla is a "growth company with no growth." This means Tesla is worth a lot, but it's not growing much. He said Tesla won't grow this year and might even shrink in 2025 because of more competition and fewer car sales. Other analysts, like those at UBS, are also worried and have lowered their price targets for Tesla. The bank is concerned about fewer people wanting electric cars and more competition, especially from China.
Key comments:
"We can concur the price wars in China are brutal however there is a sense from industry checks ... that many of these price cuts are starting to subside into spring/summer 2024," said Wedbush analyst Dan Ives.
"While an EV and battery technology leader, Tesla screens poorly relative to Mag 7 peers," said Colin Langan, an analyst at Wells Fargo.
"For the longest time, Tesla has been heavily invested in one of the market's favorite narratives, the electrification of the world's car fleet," said David Wagner, portfolio manager at Aptus Capital Advisors. "Now, the market's favorite narrative is artificial Intelligence and ESG has taken a bit of a back seat, thus the historical valuation premium may no longer be warranted, especially as future revenue growth and margin have slowed."
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