On Tuesday, Wells Fargo, an American investment bank, released its latest research report warning that the fundamentals of electric vehicle giant Tesla are continuously deteriorating. It predicts that Tesla's free cash flow (FCF) will turn negative in 2025 for the first time since 2018, reiterating its "sell" rating with a price target of $120.
Wells Fargo's chief analyst Colin Langan pointed out that Tesla faces multiple pressures, including sales, margins, working capital, and capital expenditures, which collectively cast a troubling outlook on its overall financial performance.
Difficulties in Meeting Q2 Delivery Expectations
Wells Fargo predicts that Tesla's vehicle deliveries in the second quarter of 2024 will fall significantly short of expectations. Analysis shows that to meet the market consensus estimate of 411,000 units, Tesla would need to achieve a month-on-month increase of over 50% in June, which is almost impossible given the current market and operational context.
Wells Fargo has lowered its estimate for second-quarter deliveries to 343,000 units, about 17% less than the Wall Street consensus. This implies that Tesla would experience delivery growth stagnation for two consecutive quarters.
From an annual perspective, Wells Fargo expects Tesla's total deliveries in 2024 to decline by 21% year-on-year, marking the first drastic contraction in recent years.
Pressure on Both Margins and Cash Flow
While sales are weak, margins are also taking a hit. Langan noted that revenue from Zero Emission Vehicle (ZEV) credits is decreasing, further weakening profitability. Worse still, Tesla faces over $11 billion in capital expenditure demands, coupled with potential tightness in working capital, all of which are eroding its free cash flow.
Wells Fargo believes that under these circumstances, Tesla's free cash flow in 2025 will shift from positive to negative, marking the first instance since 2018.
Lackluster Strategic Development Undermines Market Confidence
In terms of products and strategy, Wells Fargo expresses concerns about Tesla's future growth prospects. The bank points out that the market-anticipated "affordable" electric vehicle still lacks a clear timeline, putting Tesla at a disadvantage in the highly competitive mid- to low-end market.
Meanwhile, Tesla's actively promoted "fully automated driving taxi" project has yet to reassure investors. According to Wells Fargo research, the pilot program in Austin is progressing slowly, with limited scope and strict regulation. Any technical mishap could trigger comprehensive regulatory tightening, severely impacting business development.
Langan bluntly stated: "This project has yet to demonstrate its capability as a short-term profit growth engine and could potentially be a source of risk."
Wells Fargo Maintains "Sell" Rating and $120 Target Price
In conclusion, Wells Fargo has decided to maintain its "sell" rating on Tesla, with a target price of $120. This target is significantly discounted compared to the current stock price of approximately $316, indicating Wells Fargo's extremely cautious attitude towards Tesla's future performance.
Although Tesla's stock price has recently rebounded in the market, the potential deterioration of its fundamentals and financial condition could continue to exert pressure over the coming quarters.
Market Impact Observations
Wells Fargo's negative rating has caused a certain resonance in the market. By the market close on Tuesday, Tesla's stock price fell by 3.88%, closing at $316.35, indicating that investor anxiety about its financial prospects is partially reflected in trading.
In the future, whether Tesla can simultaneously focus on product innovation and cost control will be crucial to reversing its downturn. Wells Fargo's warning also reminds the market that tech giants under the halo of high valuations could face the harsh reality of cash flow challenges.
