Tesla stock hasn’t performed well to start the year. In fact, it was down by roughly 35% year-to-date as of mid-April. And Wells Fargo analyst Colin Langan believes this is only the beginning.
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Langan gave Tesla stock an “underweight” rating, saying shares could plunge by another 50%. Below, we’ll detail several factors the analyst noted that could result in Tesla’s stock losing value.
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Slower Delivery Growth
According to Business Insider, the first concern Langan expressed was that Tesla is exhibiting slower delivery growth rates. Musk’s political stance and the growing popularity of Chinese EVs could put more pressure on growth rates moving forward. This development could even put pressure on Tesla’s stock valuation and result in more declines.
Vince Stanzione, a self-made multimillionaire with over 37 years of experience in business, investing, and trading, shared how high Tesla’s valuation is compared to its peers. He disclosed that he has a short position to ensure full transparency behind his opinion, and holds nothing against Musk. However, he sees an overvalued stock that presents a shorting opportunity.
“Even after the recent falls, [Tesla is] on a forward P/E Ratio of 70 for what really is an automaker is out of line,” said Stanzione. “Investors are paying for a lot of promises and hope. Toyota, which is a profitable globe brand, is trading on a P/E of 8 and pays a dividend.”
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Price Cuts
Tesla has been cutting prices for some of its automobiles, and that’s another red flag according to Langan. Lower prices hurt profitability, and those price cuts were taking place before the tariffs. More pressure from Chinese EV makers can lead to lower profit margins for Tesla vehicles.
Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance at Creighton University’s Heider College of Business, explained how competition from China can derail Tesla stock.
“For many years, Tesla has been viewed by retail investors as a proxy for the electric vehicle industry,” Johnson said. “But they aren’t the only game in town, as other automotive companies are manufacturing electric vehicles. While EVs seem to be the future in the automotive industry, there is no guarantee that Tesla will emerge as a winner, both in terms of sales and valuation.”
One thing working in Tesla’s favor is that tariffs have kept Chinese EVs out of the U.S. market for many years. President Trump is likely to stay firm on tariffs, ensuring Tesla has less competition in the U.S. However, Chinese EVs can bite deeper into Tesla’s Eurasian market share.
Not all U.S. policies are positioned to benefit Tesla, though. The expected cut in the $7,500 EV tax credit may only make matters worse, possibly leading to additional price cuts.
Uncertainty Around Ride-Hailing Service
Langan also mentioned uncertainties around Tesla’s ride-hailing service as another reason to be cautious about the stock. The ride-hailing service has gotten more competitive, with four key players in the industry.
While robotaxis are still in their early stages, they could be quite lucrative for investors. Bernie Schaeffer, Chairman and CEO at Schaeffer’s Investments, explained the high-risk, high-reward nature of this service.
“As for ride-hailing, the key players in autonomous deployment are Waymo, Tesla, Uber and Lyft,” he explained. “Waymo is already operating in multiple U.S. cities and has forced Tesla to accelerate development. While Waymo partners with Uber and Lyft, Tesla is aiming to build its own platform — a massive undertaking that will require billions in infrastructure and user acquisition. Still, if Tesla can execute on a proprietary ride-hailing service, it could add tens — if not hundreds — of billions in shareholder value. Combine that with the potential of the Optimus vertical, and you’re looking at a company with serious optionality.”
The short-term outlook doesn’t look good for Tesla. However, long-term investors who see it as more than just an EV automaker may want to monitor the stock.
Disclaimer: This article was written before Tesla disclosed its first-quarter results on Tue, April 22.
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This article originally appeared on GOBankingRates.com: 3 Reasons Tesla’s Stock Could Drop Another 50%