On Wednesday, Wells Fargo (NYSE:WFC) issued a downgrade for Tesla (NASDAQ:TSLA) shares, moving its rating from Equal Weight to Underweight. The firm also adjusted the electric vehicle company's price target to $125 from the previous $200. The downgrade stems from concerns over Tesla's volume growth and the diminishing impact of price reductions on sales.
The analyst from Wells Fargo highlighted a series of challenges that could affect Tesla's earnings per share (EPS) in the coming years. According to the firm's estimates, Tesla's EPS for 2024 and 2025 could fall 32% and 52% below the consensus, respectively. The firm pointed to the potential difficulties in the economics of Tesla's Model 2, which is aimed at the mass market for compact vehicles.
The report further noted that Tesla's trading value is approximately 58 times the consensus EPS for 2024 and 89 times Wells Fargo's own estimate, which is significantly higher than the 31 times average of its main industry peers, referred to as the 'Mag 7'. This valuation comes despite Tesla's growth in core markets like the European Union and China being relatively flat over the last twelve months, with the United States market having declined since the second quarter.
Wells Fargo also expressed concern over the reduced effectiveness of Tesla's pricing strategy. Despite a 5% reduction in prices in the second half of the year, there was only a 3% increase in volume on a half-year basis. This strategy has led to a reduction in gross profit of approximately $6,800 per car. The firm anticipates that Tesla's vehicle volumes could remain flat in 2024 and potentially decline in 2025.
The downgrade also reflects worries about the potential consequences of price cuts, including lower lease residuals, dissatisfaction among customers, and the risk of Tesla losing its luxury brand premium. These factors combined have led Wells Fargo to take a more bearish stance on the electric vehicle maker's stock.
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