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Tesla (TSLA) experienced a significant decline of 5.5% on Wednesday, marking its largest loss in two months. The drop came after an analyst on Wall Street advised caution, prompting investors to take some profits off the table.
In a note addressed to investors on Wednesday, Barclays analyst Dan Levy downgraded Tesla shares from Overweight to Equal Weight. Levy expressed concerns about the recent rally, emphasizing that it overlooked immediate questions surrounding the stock’s fundamentals. While Tesla’s valuation is primarily driven by factors other than traditional fundamentals, such as its forward P/E ratio of 80, Levy raised intriguing points about the company’s current position compared to just a month ago.
Levy stated, “We believe the recent rally in the stock can be attributed to the market’s current AI-driven thematic trade, as well as the excitement surrounding Tesla’s announcement to open the TSLA Supercharger network to other brands. However, while it is unsurprising that the stock participated in the rally, we believe it is prudent to adopt a more cautious approach.”
Levy’s decision to downgrade Tesla rests on three key points. Firstly, he questions the potentially overblown impact of artificial intelligence (AI) on Tesla’s prospects, noting that AI is a long-term opportunity rather than an immediate catalyst for substantial valuation growth. Secondly, Levy views Tesla’s recent Supercharger agreements as primarily offering marketing benefits for the company, with any gains likely to materialize in the long run. Finally, he identifies multiple expansion as the primary driver behind the recent rally in Tesla’s stock price.
The significant increase in Tesla’s market capitalization, amounting to approximately $300 billion, has largely been due to its expanding multiple. Levy emphasizes that Tesla’s near-term fundamentals have not undergone significant changes. Unlike other AI-related stocks that have seen positive profit revisions leading to increased market caps, Tesla has not experienced a similar trend.
Levy points out several factors that contradict the expanding multiple, including Barclays’ belief that Tesla’s 2024 consensus EPS estimates are overly optimistic and need to be revised downward. Additionally, Tesla’s margins remain uncertain due to recent price cuts, although there is a possibility that they may have bottomed out. Furthermore, potential price reductions may be necessary to address bloated Model 3 inventories, and increased Model Y production in Giga Austin and Berlin could further impact margins negatively.
Despite these concerns, Levy maintains a bullish long-term outlook on Tesla’s prospects. However, he advises against purchasing the stock at its current levels, stressing the importance of considering near-term fundamentals.
Tesla’s stock experienced a steep decline following a cautionary note from Barclays analyst Dan Levy, who downgraded the stock due to concerns about the recent rally and its deviation from immediate fundamental considerations. While Levy acknowledges Tesla’s long-term potential, he recommends a more cautious stance in the short term.
