Tesla: Can Downgrades Make Sense After A 170% Rally?

Sometimes the stock market can really make you scratch your head. As investors, we’re used to being always told to follow a trend, buy into a good thing, don’t catch the falling knife. This is why the recent run of downgrades to Tesla Inc’s NASDAQ: TSLA stock is so perplexing. 

For context, shares of the electric vehicle (EV) king have been having their best first half of a year since 2020. They’ve rallied as much as 170% from the first week of January, in a move that has seen them reclaim much of the territory they lost last year. But that hasn’t stopped analysts from the likes of Goldman Sachs, Morgan Stanely, and Barclays all lowering their rating on the stock in the past week or two. 

We here at MarketBeat haven’t been shy about our feelings toward Tesla this year. In January, we pointed out how its shares were starting to gain upside momentum; in April, we saw through the poor headlines what was actually a decent report, and earlier this month, we put a $300 price target on the stock.

And with shares having had their momentum clipped as a result of these recent downgrades, we’re still in the bull camp. That’s not to say it will be all plain sailing, however. Let’s dive into the recent analyst comments and address them. 

Taking Profits

First up are those from the guys over at Barclays, who lowered their rating from Equal Weight to Overweight last week on the expectation that Tesla shares need to cool off from their hot first half of the year.

According to analyst Dan Levy and his team, the moment has arrived for investors to lock in their gains from this stage of the rally, one that they feel has become overheated after the recent AI-driven surge and the hype surrounding their Supercharger network.

It’s a strange move in that, at the same time, they still went out of their way to name Tesla the long-term winner in the EV world. However, they expect the excitement to build again in late 2024-2025 as its low-cost Model 2 starts to come online. 

This was followed by similar comments from the Morgan Stanley team, who made the same Overweight to Equal Weight move. They also flagged the effect the hype around AI has had on the stock and saw this as an opportune time to take profits off the table as shares approach fair value. They’re also bearish on the company’s upcoming earnings report, due next month, where they’re looking for EPS of $3.03 versus the wider consensus of $3.33. 

This week, Goldman Sachs added their name to the list of cautious Tesla analysts, with the same move and similar comments. Understandably, shares lost some of that momentum which had them up at their highest level since last September, but already the selling has stopped, and heading into the weekend, they’re on track to log their fourth up day. 

Longer Term Potential

Our take on it? Sure, no one ever went broke taking profits, but investors in Tesla aren’t looking for a quick buck, nor are they looking for a low-volatility stock. They have a first-mover advantage, the best economies of scale in the industry, and effectively no competition even close to them. Any headwinds that they are facing, for example, higher borrowing costs, are industry-wide, while at the same time, their annual revenue has never been higher. 

The stock’s RSI is at a healthily bullish 66, far from an overbought reading of over 70, and even while they urged caution, the analysts still gave themselves an out just in case Tesla keeps being Tesla. Morgan Stanley raised its bull case valuation to $450 from $390, while Goldman echoed Barclays in remaining bullish on the EV industry and Tesla’s leading role in it in the long term. We see Tesla remaining that stock that everyone wants a piece of, and any pullback from here is an entry opportunity that investors shouldn’t ignore.