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PlusMarkets Analysis • 01/06/2021
In the past quarter, Tesla increased its production in an effort to further develop its production line. Nevertheless, a Wells Fargo analyst recently examined its stock and was not feeling particularly optimistic about its price because there are some disruptive factors.
Tesla’s share is currently not in an easy position. Since the beginning of the year, the share price has lost roughly 13.4% year to date. Despite that, the electric car manufacturer had an incredibly successful first quarter. Tesla posted a record profit and doubled its number of vehicle deliveries. But that did not help the share price, which fell back from its record high in January in the long term.
A Wells Fargo analyst, Colin Langan, expressed three significant concerns regarding the stock’s future performance. Langan expects Tesla’s manufacturing figures to be further increased, but this figure – which in his opinion could be 12 million vehicles in ten years – would already be priced in. The potential of subsidies for electric cars could not change that much either.
According to Market Watch, «The stock TSLA, -0.89%, which hiked up 5.3% in afternoon trading Monday, fell 1.5% last week to suffer the fifth straight weekly decline. It had lost 21.5% during its weekly losing streak, and currently sits about 31% below its Jan. 26 record close of $883.09.»
Langan is worried, among other things, about production capacities – the capacities for Model 3 and Model Y should reach their 1.7 million units in 2022, but will there be enough demand for the cars? The production line will be a record volume for luxury sedans and SUVs.
»[C]hina has driven all of [Tesla’s] market share gains over the past year, so the recent negative press after a protest at the Shanghai Auto Show is a concern,» Langan wrote in his recent report. The demand for Tesla vehicles could drop since its competition is stepping up. Many car manufacturers around the world are developing their electric models and could steal Tesla’s customers.
Another problem that led to Langan feeling more pessimistic about Tesla’s stock is the cost of battery raw materials. He believes that an increase in production costs could impact the vehicles’ prices by $1,400. Referring to industry experts, the analyst emphasizes that battery costs have increased from $105 per kilowatt-hour to between $130 and $150.
These effects may materialize as soon as the contracts with Tesla’s suppliers are renegotiated. Fortunately, Tesla typically signs longer-term contracts for these materials, which mitigates the short-term impact and puts the overall effect of the situation on the lower end of the range.
«However, as these contracts are renewed, the cost per vehicle should increase by an additional $ 1,375, which would reduce margins,» said Langan.
Langan added that there could be regulatory risks relating to one of Tesla’s features called the Autopilot. Earlier this month, a man crashed and died while using the feature. A recent letter from the National Transportation Safety Board (NTSB) scrutinized the feature.
According to Langan, there is a risk that US regulators will come up with regulations to discontinue the feature.
»In the worst case, [Tesla] could be forced to deactivate the systems,» Langan explains in his press release. Concerns about the «autopilot,» officially called the automated driving system, and its safety are not new. «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,» he added.
Despite his three major concerns, Langan is optimistic about the stock’s performance in the long run, although he does not recommend getting it right now.
The group, headed by Elon Musk, continues to lead the EV market, despite competition and a difficult economic situation imposed by the pandemic.
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