In a new client note, JP Morgan analyst Ryan Brinkman argues that Tesla stock has risen too fast, given numerous uncertainties surrounding the business decisions being made, and investors should exercise more caution in approaching the automaker’s shares.
In the note, he said, “Tesla’s softer trend and below-consensus adjusted automotive gross margin comes before the impact of large price reductions that will primarily be felt beginning in the first quarter. As such, we view margin trajectory negatively and expect that consensus margin expectations are likely to decline.”
Brinkman restated his Underweight (sell equivalent) rating on the company’s shares. The $120 price target he set for the stock assumes a 32% downside from the current share price.
On Monday Tesla stock was down slightly in premarket trading before going on to lose more than 6% by the closing bell, at $166.66. The stock was still up about 35% for the year.
Brinkman added, “Although both technology and execution risk seem substantially less than was once feared, expansion into higher volume segments with lower price points seems fraught with greater risk relative to demand, execution, and competition. Meanwhile, valuation appears to be pricing in upside related to expansion into mass-market segments well beyond our volume forecasts for the Model 3.”
Brinkman’s bearish take on the stock follows the company’s mixed fourth quarter report and full-year outlook last week.
In the fourth quarter of 2022, Tesla’s gross profit margin was 23.8%, missing the estimate of 25.4%. Meanwhile, the company’s gross profit margin was 25.9%, while analysts had predicted 28.4%.
For his part, Tesla CEO Elon Musk sounded upbeat with investors on his earnings call. He also dismissed concerns about demand, saying, “Thus far in January we have seen the strongest orders year to date ever in our history.” However he also warned investors that it was likely the world was facing a “severe” recession this year.
It would appear Musk already factored that into Tesla’s volume growth guidance for 2023, which predicted growth of 38%, compared to a longer term target of 50%.
However not all analysts are bearish on the electric automaker. Berenberg analyst Adrian Yanoshik upgraded his rating on the company’s stock from Hold to Buy, noting concerns over pricing were “misguided.”
