On Monday, Wells Fargo (NYSE:WFC) reiterated its underweight rating on Tesla Inc (NASDAQ:TSLA) with a steady price target of $125.00. The firm's stance reflects concerns over Tesla's delivery growth, which is expected to moderate due to decreasing demand and diminishing returns from price cuts.
Analysts at Wells Fargo project that Tesla's auto gross margin, excluding credits, will fall by approximately 130 basis points year-over-year due to potential further price reductions and lower volumes.
The financial institution's forecast for Tesla's full-year 2024 deliveries stands at around 1.8 million units, indicating no growth from year to year and remaining about 10% below the consensus.
Wells Fargo highlighted the flattening trends in Tesla's key markets, including the United States, Europe, and China, which add to the firm's cautious outlook. The analysts noted that with government incentives potentially running out, Tesla has limited options to boost volumes aside from pricing strategies and model updates.
The recent price cuts on Tesla's high-volume Model 3 and Model Y vehicles have shown diminishing returns, according to Wells Fargo. In the second half of 2023, a 5% price reduction resulted in only a 3% increase in volume. The analysts estimate that Tesla has roughly 11% of pricing power left before reaching the breakeven point for EBIT (earnings before interest and taxes).
Looking ahead, Wells Fargo anticipates a significant year-over-year earnings per share (EPS) decline of approximately 36% for Tesla in 2024. This forecast is driven by lower delivery numbers, price cuts, and increased operational expenses. Furthermore, the firm expressed concerns about the demand for Tesla's upcoming Model 2 and the impact of using "unboxed" production methods on future margins beyond 2025.
InvestingPro Insights
In light of the analysis presented by Wells Fargo, it's pertinent to consider additional insights that could provide a broader perspective on Tesla's financial health and market position. With a robust market capitalization of $559.85 billion, Tesla remains a dominant force in the automobile industry. Despite the concerns over delivery growth and auto gross margin pressures, Tesla holds more cash than debt on its balance sheet, which is a reassuring sign of financial stability.
However, it's important to note that 16 analysts have revised their earnings downwards for the upcoming period, reflecting a cautious sentiment that aligns with Wells Fargo's outlook. This is compounded by Tesla's high P/E ratio of 37.24, suggesting that the stock is trading at a premium relative to near-term earnings growth. Additionally, the company's stock price has experienced significant volatility, with a 1-month price total return of -13.25% and a 3-month return of -29.25%, highlighting investor concerns.
For those considering an investment in Tesla, it is worth exploring the full suite of InvestingPro Tips that delve deeper into the company's financial metrics and market performance. There are 21 additional tips available, which can be accessed with the coupon code PRONEWS24 for an extra 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro. These insights could prove invaluable in making a well-informed investment decision.
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