Tesla (TSLA) has just received a horrendous analyst downgrade, and has become the S&P 500’s worst performing stock.
The EV maker’s shares are out of favor, but there may be an opportunity to go contrarian.
TSLA stock could plummet before a game-changing announcement causes it to surge again.
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It’s been a rough ride for Tesla (NASDAQ:TSLA) stock lately. It has become the worst year-to-date performer in the S&P 500 index. These developments may discourage some, others may see a buying opportunity.
Don’t assume it’s the right time to invest. The factors driving its poor performance are likely to persist in the months ahead. More likely than not, the stock is going to come under even more pressure, but there is a silver lining. Tesla could end up falling to a very favorable entry point. Shortly after that, shares may make a comeback.
TSLA Stock Has Way to Go Before Bottom
On March 13, Wells Fargo analyst Colin Langan downgraded Tesla, changing his rating from the equivalent to “hold” to the equivalent to “sell,” and lowering his price target to $125 per share, down from a prior price target of $200 per share.
In Langan’s view, vehicle price cuts are having a diminishing impact on demand, which has been affected by a slowdown in EV demand growth.
In turn, the analysts anticipate the EV maker to report flat to slightly negative revenue growth, as well as declining earnings, in both 2024 and 2025.
With TSLA stock trending lower following this downgrade, the market is clearly taking heed of this downbeat forecast. Worse yet, if this forecast proves to be accurate, forget about shares falling to $125 per share. A drop to even lower prices is well-within the realm of possibility.
Even if investors (expecting an eventual earnings rebound) decides not to derate TSLA to a lower valuation, shares could move lower in tandem with a drop in earnings per share (or EPS).
If EPS falls in line with Langan’s 2024 and 2025 earnings forecasts ($2 and $1.90, respectively), a drop to just over $100 per share may be in store.
When to Pounce, and Why
Wedbush’s Dan Ives believes that pessimism is fully reflected in TSLA’s valuation. At least, based on his statement that “even the New York City cabdriver is bearish” on the stock.
However, if Ives’ own 2024 recovery forecast for Tesla fails to play out, it is very much possible that TSLA stock slides to $125 per share, $100 per share, or down to double-digit price levels. If this moment arrives, and it’s not just the fair weather fans losing faith, consider this the time to pounce.
Although there’s a strong chance that disappointment continues in the near-to-medium term, it’s not as if the current EV sector downturn is the beginning of the end for this vehicle electrification powerhouse. By 2025, macro issues could finally enter the rearview mirror.
I’m talking about not just macro issues affecting U.S. demand, like high interest rates. I’m talking about the issues affecting China’s economic growth as well.
If these issues normalize, Tesla could experience a sales resurgence, and a profitability rebound. Also, don’t forget that a game-changing catalyst I’ve discussed in prior Tesla coverage has not gone away: that would be the launch of Tesla’s first lower-priced vehicle model.
The Verdict: Hold Off for Now
As what happened from late 2022 to early 2023, TSLA could quickly go from bottoming out to bouncing back, as positive news helps to renew hype and enthusiasm for shares.
The “positive news” came as Tesla’s aggressive price cuts. In 2024/2025, news about Tesla’s lower-priced Model 2 vehicle model could be what does the trick.
Analysts at Evercore recently called for the Model 2 vehicle catalyst not to begin playing out until as late as 2027, but given how much it may affect TSLA’s price performance, CEO Elon Musk may be motivated to speed up the Model 2’s debut, in order to exceed newly reset expectations.
There’s comeback potential with TSLA stock, but not until shares fall back into the “buy zone” (between $100 and $125 per share). Keep an eye out and keep sitting tight for now.
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