Wells Fargo (NYSE:WFC) analysts said they retain a pessimistic outlook on Tesla (NASDAQ:TSLA) stock, reiterating an Underweight rating and the price target of $120, which implies a possible downside of more than 50% from current levels.
Tesla stock climbed roughly 40% over the past month, “mostly driven by ‘razzle-dazzle’ headlines,” analysts noted, but fundamentals remain weak.
“We suspect a largely retail-driven rally has squeezed out shorts and forced long-only rebalancing. However, infatuated investors ignore the warning signs,” Wells Fargo analysts wrote.
Despite the positive news, Q2 deliveries were still down 5% year-over-year, likely bolstered by financing promotions of up to $5K. Moreover, the anticipated robotaxi reveal has been delayed to October. Even more troubling is the $9,000 tariff risk on Model 3s in Europe, Wells Fargo highlighted.
Analysts said Tesla's recent rally has been fueled by several positive developments, including beating Q2 delivery estimates, the approval of Elon's $56 billion pay package, FSD testing in China, the deployment of Optimus, and robotaxi hype.
"That said, we suspect technical factors likely exacerbated the move." Short positions were likely covered, Tesla stock appears under-owned by mutual funds prompting some rebalancing, and retail interest surged to about 48% of the shareholder base, the investment firm highlighted.
Meanwhile, the Tesla Energy story is promising, Wells Fargo acknowledged, with the company reporting a record 9.4 MWh of energy storage deployed in Q2, more than double the previous quarter. This is Tesla's highest-margin business, with over 20% gross margin in the last three quarters, leading analysts to raise FY24 Energy Gen sales estimates by ~50%.
However, this business "can be lumpy since it is largely project-based,” analysts cautioned.
Q2's deployments, annualized at ~38 GWh, are close to the reported 40 GWh maximum capacity after adding a second shift post-Q1. Also, the solar segment has been shrinking, they added.
Furthermore, investors have largely ignored the impact of new US and EU tariffs, according to analysts. Biden's EV battery tariffs will add around $1,000 to the cost of the US Model 3 SR, while EU tariffs on Chinese EVs will add approximately 20.8%, or about $9,000, to the EU Model 3 from China, significantly more than the $1,600 price increase.
These tariffs are estimated to add $600 million in costs for FY24 and around $1.2 billion for FY25. Additionally, the Chevron (NYSE:CVX) deference ruling poses a risk to Tesla if US regulations are eased, reducing EV credit values.
"We also see a Trump win as a risk to TSLA given [the] risk to IRA benefits,” analysts added.
Against this backdrop, Wells Fargo analysts have raised their Q2 2024E estimate from $0.41 to $0.50, reflecting leverage on higher deliveries and Energy & Storage strength, partially offset by price cuts. Conversely, the FY24E EPS has been lowered from $1.75 to $1.60 due to added costs from US and EU tariffs, assuming flat pricing for the remainder of the year. EPS estimates for 2025-2028 have also been reduced to account for the increase in EU tariffs.