EV tide shift makes Wells say sell Tesla, Morgan Stanley more bullish on autos

Price and demand concerns, alongside a premium valuation, have pushed Wells Fargo to lower its rating on Tesla (TSLA) to Underweight, the firm’s equivalent of a sell rating. Wells says it expects the company’s volume to disappoint as price cuts are having a diminishing impact on demand. Meanwhile, Morgan Stanley upgraded its U.S. auto industry view to Attractive from In-Line with auto manufacturers pivoting to capital efficiency and return after years of peak spending on electric vehicles and autonomous vehicles.

SELL TESLA: Wells Fargo downgraded Tesla to Underweight from Equal Weight with a price target of $125, down from $200. The firm expects the company’s volume to disappoint as price cuts are having a diminishing impact on demand. Lower deliveries and prices drive the firm’s 2024 earnings estimate to 32% below consensus. Tesla’s price-to-earnings premium valuation versus the “Magnificent 7” is likely at risk, Wells points out. The firm believes headwinds from disappointing deliveries and more price cuts from Tesla will likely drive negative earnings revisions. It further thinks Model 2 economics “are likely tough” as a mass market compact vehicle. Tesla already trades at 58-times consensus 2024 earnings and 89-times Wells’ estimate, a premium to its “Magnificent 7” peers trading at 31-times.

AUTO NARRATIVE CHANGE: Morgan Stanley upgraded the firm’s U.S. auto industry view to Attractive from In-Line with auto manufacturers pivoting to capital efficiency and return after years of peak spending on electric vehicles and autonomous vehicles. The industry has attractive optionality to lower spending, increased collaboration, and restructured portfolios, says the firm, which notes there is 10% upside on average to the price targets across the firm’s U.S. autos coverage. Over the past few months, the firm has seen auto demand trends “strongly support our ICE elongation thesis,” as well as management teams at legacy OEMs being “largely receptive to our capital discipline and cash return thesis.”

Morgan notes that fiscal year 2023 saw the advent of EV stagnation globally with Tesla’s Q3 watershed warning to the EV industry. Tesla’s slowing demand and profit warnings coupled with continued core auto estimate revisions have implications for its global competitors and suppliers. The firm has since seen EV penetration forecasts revised and the beginning of an overdue re-calibration of legacy OEM EV targets. While EVs are the future, it’s the internal combustion engine, or ICE, product that generates the profits and funds the dividends and buybacks, while relatively insulated from Tesla and Chinese EV disruption. Morgan expects the EV startups under its coverage to confront slowing demand and capital constraints, pressuring production/deliveries in fiscal 2024. At the same time, it expects continued negative revisions at Tesla to ultimately trigger price increases to protect margin, further pressuring volume.

PRICE ACTION: In Wednesday morning trading, shares of Tesla have dropped almost 4% to $170.72.

Other publicly traded companies in the automaking space include Ford (F), General Motors (GM), Honda (HMC), Mercedes-Benz Group (DDAIF), Nissan (NSANY), Stellantis (STLA), Toyota (TM), Volkswagen (VWAGY), Rivian (RIVN), Lucid (LCID), Nikola (NKLA), Nio (NIO), Xpeng (XPEV), and Li Auto (LI).