Wells Fargo Reiterates Underweight on Tesla, $120 Price Target

Wells Fargo analyst Colin Langan reiterated an Underweight rating and $120 price target on Tesla (NASDAQ: TSLA)

“Fundamentals Remain Tough – Expect Q2 Miss We forecast Q2 EPS of $0.20 below consensus of $0.41, driven by lower EV credits & weaker Energy Gen margins.

VA consensus forecasts EV credits of ~$650M, up from $595M in Q1 despite the end of CARB in late May. Also, VA consensus Eng Gen margins are 24%, down slightly from 29% despite China tariffs.

Our auto GM ex EV credits of 13.3% is slight above VA consensus of 13% & up from 12.5% in Q1 driven by leverage & the non-repeat of high Q1 warranty costs.

Q3 Pop than Q4 Drop On Sept 30 the IRA EV buyer tax credit of $7,500 will end. This likely pulls forward volumes into Q3.

We now expect Q3 deliveries to eclipse 400K units, followed by a large drop in Q4. Also, this implies the coming ‘affordable’ model will be higher px and/or lower margin.

We expect FY25 deliveries of 1.48M, ~10% below IR-consensus & down 17% y/y.

We also expect TSLA to cut pricing by ~4% in Q4 to mitigate the end of IRA credits which implies a meaningful Q4 margin step-down.

Framing ZEV Credit Headwind The revocation of CARB’s waiver in late May likely ends ZEV credits. Reg credits were ~32% of TSLA’s 2024 EBIT. We est.

ZEV credits (for CARB states) made up ~50% of TSLA’s reg credit sales. We est. reg credits fall ~$170M from Q1 to Q2, with ZEV help ended in Q3.

This would cut the reg credits in half, from Q1’s base of ~$1,800/unit to ~ $900/unit in Q3/Q4. Only GHG & EU credits would remain.

The value of GHG credits also likely falls as EPA rules likely ease.

Tariffs & BBB Hit Energy Gen The batteries for TSLA’s Energy Gen biz are LFP batteries from China & subject to China tariffs which averaged ~70% in Q2 though ended at just ~30%.

If 50% of Energy Gen COGS are batteries, a just-30% tariff would lower 2024 margins from 26% to 15% in 2025. Inventory stockpiling may help, though tariffs started in Feb 4.

All-in, we est margins fall to 12% in Q2 & recover to 17% in Q4. There are also slight negative demand impacts from the BBB enactment (see below).

EPS & PT Changes We maintain our 2025E EPS to reflect higher volumes in Q2 & Q3, offset by lower volumes & IRA-expiration related price cuts in Q4.

Our 2025 EPS estimate of $0.80 remains ~57% below consensus. We maintain our 2026-2028E EPS estimates.

Our $120 PT reflects the output of our 3-stage DCF analysis of the core auto business assuming a 13% WACC, 10% mid-term growth rate, and a 10% terminal growth rate.”

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