Investing.com -- Wells Fargo analysts placed Tesla (NASDAQ:TSLA) on their Q4 2024 Underweight Tactical Ideas list in a note Tuesday, citing concerns about weakening demand and the negative impact of price cuts on the company's margins.
Wells Fargo noted that they expect "declining delivery growth driven by lower demand" for Tesla vehicles, which could further dampen the company's performance in the coming months.
The analysts highlighted that Tesla's strategy of cutting prices to stimulate demand may have diminishing returns. They estimate that "auto gross margin ex-credits fall by ~400bps y/y given lower volumes and continued effective price cutting."
This bearish view comes as Tesla faces increasing pressure from competitors in the electric vehicle (EV) market, alongside economic factors that are weighing on consumer demand.
Wells Fargo pointed to these challenges, which they believe will result in significant downside risk for Tesla's stock in Q4. The report also emphasizes that the continued price reductions could have a negative impact on the company's profitability, compounding concerns about Tesla's long-term growth prospects.
Wells Fargo maintained an Underweight rating and a $120 price target on Tesla, suggesting a potential 54% downside. The bank concluded that it remains cautious on Tesla's valuation compared to the other Magnificent 7 stocks and sees a risk to its AI strategy.
Wells Fargo's call is in contrast to a note from Morgan Stanley on Tuesday which maintained an Overweight rating on the electric vehicle giant. Morgan Stanley analysts told investors it believes the development of Generative AI (Gen AI) and Large Language Models (LLMs) could be the "great unlock" for Tesla's value, particularly in monetizing its AI capabilities.
The report from Wells Fargo includes Tesla alongside Ulta Beauty (NASDAQ:ULTA) as one of their Underweight Tactical Ideas, suggesting that these stocks could face downward pressure due to various sector-specific challenges.