Tesla stock is an ‘underweight tactical idea’ at Wells Fargo for the fourth quarter by Investing.com

Investing.com — Wells Fargo analysts placed Tesla (NASDAQ:) on their list of underweight tactical ideas for the fourth quarter of 2024 in a note on Tuesday, citing concerns about weakening demand and the negative impact of price cuts on margins of the company.

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 could yield diminishing returns. They estimate that “automotive gross margin, excluding credits, declines ~400 bps YoY given lower volumes and continued effective price reductions.”

This bearish view comes as Tesla faces increasing pressure from competitors in the electric vehicle (EV) market, in addition to economic factors weighing on consumer demand.

Wells Fargo pointed to these challenges, which they say will result in significant downside risk to Tesla’s stock in the fourth quarter. The report also highlights that the continued price cuts could have a negative impact on the company’s profitability, further heightening concerns about Tesla’s long-term growth prospects.

Wells Fargo maintained an Underweight rating and a $120 price target on Tesla, indicating a potential downside of 54%. The bank concluded that it remains cautious about Tesla’s valuation compared to the other Magnificent 7 stocks and sees a risk to its AI strategy.

Wells Fargo’s call contrasts with a note from Morgan Stanley on Tuesday, which maintained an Overweight rating on the electric car giant. Morgan Stanley analysts told investors they believe the development of Generative AI (Gen AI) and Large Language Models (LLMs) could be the “big unlock” for Tesla’s value, especially when it comes to monetizing its AI capabilities.

Wells Fargo’s report names Tesla alongside Ulta Beauty (NASDAQ:) as one of their “Underweight Tactical Ideas,” suggesting these stocks could face downside pressure from several sector-specific challenges.