The shares of Tesla Inc (Nasdaq: TSLA) faced selling pressure on Thursday after Dan Levy, an analyst at Barclays, downgraded the stock’s rating to Equal Weight from Overweight, citing the recent steep rally that defied the short-term fundamentals of the stock. The financial institution stated that in the short-term it would be prudent to stay away from Tesla’s stock, which has appreciated 52% in May. The stock of Tesla closed Thursday’s trading session at $264.61, down $5.15 or 1.98% from the prior close.
The stock of Tesla usually trades at a considerable premium to the value reflected by its fundamentals. Currently, the shares trade at a forward price-to-earnings ratio of 80. However, the analyst has highlighted some important facts by referring to where the stock was trading a month ago.
In a note to clients, Levy stated that the AI-led rally was primarily the reason for the stock’s latest steep uptrend, in addition to charging related deals with other prominent automakers. Even though the stock’s participation in the recent market rally did not surprise the analyst team, he believes it would be prudent to maintain a cautious approach and stay away from the stock for the time being.
Levy’s basic premise for the downgrade stems from three crucial aspects: the potentially exaggerated impact of AI, the uncertain perks of Tesla’s latest Supercharger agreements, and, perhaps most significantly, how concurrent expansion affects “the overall run.”
Nevertheless, the analyst sees AI as a long-term opportunity for the company and cannot include it for valuation purposes at this point. Additionally, according to Levy, Tesla’s charging-related agreements with Ford, Rivian, and GM open doors for long-term benefits and not otherwise.
According to Barclay’s analyst, the main reason for the roughly $300 billion increase in stock valuation in recent times “has been its expanding multiple.” Dan Levy points out that there were no short-term changes in the fundamentals. He also argues that the rally in AI-related equities was driven by an upward revision in profit estimates, a scenario not applicable to Tesla.
Dan Levy is of the opinion that, currently, several aspects are against the high valuation enjoyed by the company. In particular, Levy points out that the company’s earnings estimate of analysts for 2024 is excessively high and needs to be revised downward.
Furthermore, according to the analyst, the margins of Tesla remain in flux due to the recent price decreases, even though it is possible that the profit margins have already hit their nadir. Levy believes that considering the puffed-up inventories of the Model 3 variant and the boosted production of the Model Y at the Berlin and Giga Austin facilities, additional price deductions may be required. In such a scenario, Levy points out that Tesla’s margins will be further affected.
Based on the aforesaid facts, as mentioned earlier, Dan Levy downgraded the stock’s rating to Equal Weight from Overweight. However, he upwardly revised the stock’s price target to $260 from $220.
Despite the downgrade, Levy remains bullish on Tesla’s long-term growth story. However, he is not willing to make a bet at these levels. In his research report, Levy states that the equity research firm’s perspective remains that Tesla is the main original equipment manufacturer (OEM) that will lead the way in the ongoing competition to establish electric vehicles as the dominant mode of transportation. However, he emphasizes the need to look at the short-term fundamentals of the company.
The rating downgrade, despite the upward revision of the price target, is expected to keep Tesla stock range-bound in the short term.
The historical price chart indicates that Tesla’s stock has broken the ascending triangle. The stock is also trading above its 50-day moving average, while the MACD indicator is showing a positive reading. Therefore, we anticipate Tesla’s stock to remain in an uptrend in the short term.
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