Why Wells Fargo Is Pumping the Brakes on Tesla

Tesla Inc. (NASDAQ: TSLA) has been a focal point for many investors over the past year, as the stock has more than doubled in that time. However, the electric vehicle (EV) manufacturer could be slowing down, at least according to one analyst.

Wells Fargo initiated coverage of the stock with an Equal Weight rating and a $590 price target, which implies upside of just 1.6% from the most recent closing price of $580.88.

The investment house sees modest upside near term from deliveries and likely benefits from added U.S. EV credits. However, Wells Fargo sees near-term risks around rising raw material costs and possible increased U.S. regulation on Autopilot. I the mid-term, the firm is cautious Tesla will have sufficient Model 3/Y demand to meet the large amount of added capacity.

Wells Fargo further detailed in its report:

We expect deliveries to continue to surprise to the upside near term, which gives support to TSLA bulls. We see three notable concerns. One, once Model 3/Y capacity comes fully online in ~2022, we are cautious that there will not be enough demand for the ~1.7m in capacity available for these products as it would imply new record luxury sedan & SUV volumes. Recent negative headlines in China add to this concern. Two, EV battery raw materials cost have spiked >50% likely adding ~$25/kWh or ~$1,375 per vehicle once contracts reset. Three, there is US regulatory risk around Autopilot, the failure to add driver monitoring heightens the risk of US regulators mandating changes. In a worst case, TSLA could be forced to disable the system.

Looking ahead, Wells Fargo’s 2021 earnings estimate of $4.75 per share is about in line with consensus, as the firm is slightly above consensus on deliveries but below consensus on margins given rising battery raw material costs. The 2022 earnings estimate of $5.60 per share is below consensus on margins, reflecting raw material headwinds. Also, 2023 to 2025 per-share earnings estimates of $5.25, $5.25 and $6.70 are below consensus largely on lower volume assumptions.

Excluding Monday’s move, Tesla has underperformed the broad markets, with the stock down about 18% year to date. In the past 52 weeks, the stock is up closer to 251%.

Tesla stock traded up about 1% to $585.54 on Monday morning, in a 52-week range of $157.00 to $900.40. The consensus price target is $657.52.

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