The Ratings Game: Tesla initiated at Wells Fargo, and there are 3 reasons analyst Colin Langan isn’t bullish

Wells Fargo analyst Colin Langan said Tesla Inc. should keep beating deliveries expectations over the near term, but there are “three notable concerns” for him to not recommend investors buy the stock at current prices. Langan initiated coverage of the electric vehicle (EV) maker on Monday with an equal weight rating and a stock price target of $590, which is1.5% below current prices.

The stock
TSLA,
2.87%,
which surged 3.1% in morning trading Monday, fell 1.5% last week to suffer the fifth straight weekly decline. It had lost 21.5% during its weekly losing steak, and currently sits about 32% below its Jan. 26 record close of $883.09. Langan said even after the recent selloff, and the potential for increased EV credits, he estimates the stock is pricing in the delivery of more than 12 million vehicles in 10 years, which is more than any global auto maker currently delivers. While he expects Tesla’s deliveries to keep surprising to the upside, the following are the reasons he isn’t currently bullish on the stock:
“If Tesla builds it, will customers come?” Langan is concerned that once Model 3 and Model Y production capacity comes fully online in 2022, there may not be enough demand for the approximately 1.7 million in capacity available for these vehicles as it would imply record volume for luxury sedans and SUVs.

“[C]hina drove all of [Tesla’s] market share gains over the last year; therefore, recent negative press following a protest at the Shanghai Auto Show is a concern,” Langan wrote in a note to clients. “Moreover, global EV competition is accelerating with the number of available EV models expected to double in the U.S. this year.” See related: Tesla stock falls again after downbeat China sales data.
Key battery raw material costs are up more than 50% in the past year. Langan estimates that the increase in costs will add nearly $1,400 to the price of each vehicle once contracts reset.

Industry experts suggest battery costs have increased from $105 per kilowatt-hour to $130/kWh to $150/kWh, Langan said. “Fortunately, Tesla typically locks in longer-term contracts for these materials mitigating the near-term impact and putting the total impact at the lower end of the range,” Langan wrote. “However, as these contracts renew, there should be an additional $1,375 cost per vehicle from this rise, which would cut into margins.”
Regulatory risk around Autopilot is rising. Langan is concerned that the failure to add driver monitoring heightens the risk that changes will be mandated by U.S. regulators. “In a worst case, [Tesla] could be forced to disable the systems,” Langan wrote.

He said there has always been concerns over the “Autopilot” name and its safety, but scrutiny has increased with the recent release of a letter from the National Transportation Safety Board (NTSB) regarding the safety of automated driving systems (ADS) and the importance of driver engagement. Also read: Tesla driver killed in crash posted videos of himself driving hands-free. Read more: Officials walk back Autopilot determination in fatal Tesla crash in California. “Limitations of this key selling feature would be a negative for current owners, and could limit planned features in the full self-driving (FDS) roll out,” Langan wrote. Langan is bullish on the longer-term prospects for Tesla and the EV market, in which Tesla is clearly the leader, but he noted that the economics of the industry “are still surprisingly tough,” as government support remains the biggest driver of battery EV sales. He said possible near-term catalysts for the stock include new capacity plans, release of FDS and the announcement of any new products, as well as any news on battery cost trends and regulatory concerns. Of the 38 analysts surveyed by FactSet who cover Tesla, Langan is one of the 13 who rate the stock the equivalent of hold, while 16 rate it the equivalent of buy and 9 rate it the equivalent of sell. The average price target is $598.92. The stock has lost 15.2% year to date, but has still soared 266.5% over the past 12 months. In comparison, the S&P 500 index
SPX,
1.08%
has gained 11.8% this year, and rallied 42.1% over the past year.

                  

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