JP Morgan note pours cold water on blistering rally

Tesla shares have risen too quickly this year on numerous uncertainties surrounding the EV maker’s business, argues JP Morgan analyst Ryan Brinkman.

“Tesla’s softening trend and below-consensus adjusted gross margin for autos come ahead of the impact of major price reductions that will be felt especially from the first quarter,” Brinkman said in a new customer note. “As such, we see the margin trajectory negatively and expect consensus margin expectations to likely decline.”

Brinkman reiterated an underweight (equivalent sales) rating for Tesla stock. His $120 price target for Tesla assumes a 32% decline from current levels.

Shares of Tesla fell slightly in premarket trading Monday. The stock is up about 44% so far through 2023.

“While both technology and execution risk appear significantly smaller than once feared, expansion into higher volume segments with lower price points appears fraught with greater risks relative to demand, execution and competition,” added Brinkman. “Meanwhile, the valuation appears to have a positive impact on expansion into mass market segments well beyond our Model 3 volume projections.”

The bearish comment on Tesla comes after the company reported a mixed — at best — outlook for the fourth quarter and full year last week.

Tesla’s fourth-quarter gross profit margin came in at 23.8%, lower than estimates of 25.4%. Gross profit margin in the auto industry was 25.9%, compared to analyst estimates of 28.4%.

A Model S sedan undergoes a water test at the Tesla car factory in Fremont, California. Tuesday, June 12, 2012. (Patrick Tehan/Staff) (Photo by Patrick Tehan/MediaNews Group/Bay Area News via Getty Images)

During the earnings call with investors, Elon Musk, CEO of Tesla, did his best to sound enthusiastic about Tesla’s business. He also addressed concerns about demand, stating: “So far in January we have seen the strongest orders in our history so far.” At the same time, however, he warned of a “serious” recession this year.

The economic warning appears to be baked into Tesla’s 2023 volume growth forecast of 38%, which fell below a long-term target of 50%.

Not everyone on the street is in Brinkman’s camp on Tesla: Berenberg analyst Adrian Yanoshik upped his rating of Tesla to Buy from Hold, citing “misguided” price considerations.

Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.

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