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Tesla Stock Downgraded: Is the Party Over?

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The party was just starting. Analysts were only just warming up to Tesla (NASDAQ:TSLA) stock’s prospects. As of January 8, the stock was up over 17% since the turn of the decade. However, CFRA downgraded it on January 8 after market hours, and Baird followed suit on January 9 before the market opened. Tesla stock closed 2.2% down yesterday and was up 0.8% in premarket trading at 5:01 AM ET today.

CFRA analyst Garrett Nelson downgraded Tesla stock to “sell” from “hold.” He said, “We see the recent China factory start-up weighing on Automotive gross margins in [the first half of] 2020 and U.S. sales being negatively impacted by the recent phase-out of its federal EV tax credit, rising competition and seasonality.” CFRA maintained its price target of $400 in spite of the downgrade.

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Baird follows suit in downgrading Tesla stock

Baird analyst Ben Kello raised the target price on Tesla stock by $170 to $525. However, Kello downgraded Tesla stock to “neutral” from “outperform.” He said, “While we remain constructive on TSLA’s long-term prospects, we now believe estimates are properly calibrated (particularly on the buy-side) and valuation appears more balanced. Admittedly battle-worn after a contentious two year period (reach out to hear our best stories) we will wait for further execution to get more positive on the name.”

The recent rally took Tesla past the combined valuation of GM (NYSE:GM) and Ford Motor Company (NYSE:F). GM and Ford still rule the US auto market with a combined market share of 31%. In comparison, Tesla commanded just a 1% market share in 2019. Yesterday, GM stock closed with a rise of 1.24% and a market cap of $48 billion. Ford stock rose marginally to a market cap of $37 billion.

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CNBC’s Jim Cramer is raising the stakes on Tesla

While Tesla bull Kello has become cautious, a recent Tesla convert, CNBC’s Jim Cramer, is upping the stakes on Tesla. This week, He said, “Tesla has growth in spades; of course investors will pay up for it. GM has barely any growth. Ford’s actually shrinking. Nobody wants to pay up for stagnation.” He also said, “Wake me up when Tesla’s double the value of Ford and GM put together.”

Other analysts also had good things to say about Tesla. Wedbush’s Dan Ives recently raised his price target on Tesla stock by $100. Credit Suisse’s Dan Levy said last month, “We believe Tesla is leading in the areas that will likely define the future of carmaking – software, and electrification.” This week, Levy raised the price target on Tesla stock by $140 to $340.

What are other Wall Street analysts saying?

With the recent rating changes, only ten out of 33 analysts surveyed by Reuters call TSLA a “buy.” An equal number of analysts call it a “hold,” and 13 analysts call it a “sell.” Its average target price of $328.34 points to 31.8% downside.

This may be an indication that the rally has stretched too far. Yes, Tesla surprised many with its ramp-up in China and Model 3 deliveries in the US. Yes, the company has cut costs and made its business nimbler. However, it still has a lot to prove when it comes to scaling up amid competition. So far, Tesla has been the leader in the EV (electric vehicle) segment. However, a lot of legacy automakers and startups are building competing products. If Tesla can’t manage to keep its market share amid the rising competition, its stock could see pressure. Regulatory issues such as EV tax credits could also hamper Tesla’s growth. Will the company prove Cramer right and most others wrong? We’re skeptical.

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