Bank of America (BAC) analyst John Murphy has shifted his stance on Tesla Inc. (TSLA), downgrading the stock from ‘Buy’ to ‘Neutral’ while simultaneously raising the price target from $400 to $490. This adjustment reflects a nuanced view of Tesla’s market position, considering both the optimism surrounding its future growth drivers and the significant execution risks that accompany them.
Murphy’s analysis highlights that since their last upgrade in April 2024, the market’s perception of Tesla has become more favorable, particularly with the anticipation around the Robotaxi service. This service, which Tesla plans to launch this year, is expected to be a game-changer, potentially contributing nearly 50% to Tesla’s valuation. The analyst estimates that the Robotaxi could be valued at $420 billion in the U.S. alone, scaling to over $800 billion globally. The model assumes Tesla will initially operate its own fleet but anticipates opening it up to third-party providers over time. This service could significantly undercut traditional ride-sharing services like Uber (UBER) and Lyft (LYFT) in terms of cost per mile, thanks to the absence of a human driver, thereby offering consumers lower prices while still achieving higher margins for Tesla.
However, the execution risks are substantial. The rollout of Robotaxi services is expected to start slowly with high initial costs per mile, which could only be mitigated at scale. This uncertainty around scaling operations and managing costs is a key factor in Murphy’s decision to downgrade Tesla to ‘Neutral’.
On the Full Self-Driving (FSD) front, Tesla has made notable progress. After a firsthand experience at Tesla’s gigafactory in Austin, Murphy was impressed with FSD’s capabilities. The adoption rate of FSD has seen a significant increase, now at about 60% for Cybertrucks sold in 2024, up from 22% in the first quarter of 2023. With projections of 23 million vehicles capable of running FSD by 2030 and 75 million by 2040, this technology is poised to become a major revenue and profit driver for Tesla, potentially generating billions in annual earnings before interest and taxes. Yet, the valuation of FSD does not include potential revenues from licensing to other car manufacturers, indicating further upside potential.
Despite these positive developments, several factors contribute to the ‘Neutral’ rating:
– The introduction of a new low-cost vehicle model in the first half of 2025 and another in the second half are crucial for volume growth but come with their own set of production and market acceptance risks.
– The launch of the Robotaxi service in mid-2025, while promising, hinges on numerous technological and regulatory variables.
– The ramp-up of Megapack production in Shanghai could bolster Tesla’s energy storage segment, but again, execution is key.
– Updates on FSD subscribers and broader production of the Optimus robot could either validate or challenge current market expectations.
– The risk of less favorable new policies could impact Tesla’s operations, and a capital raise, while potentially positive for growth, adds another layer of complexity.
Thus, while there are several catalysts that could propel Tesla’s stock price, the high execution risk associated with these initiatives underpins the ‘Neutral’ rating by BofA. The company’s future, therefore, hinges on its ability to navigate these challenges successfully.
Price Action: As of the latest update, Tesla’s shares have experienced a decline of $16.71, or 4.07%, currently trading at $394.34. The stock has fluctuated between a daily low of $391.20 and a daily high of $414.33, reflecting the volatility that Tesla has experienced in recent sessions. Despite this short-term decline, Tesla’s stock has performed remarkably well over the past year, with its share price increasing by 67.43%. Additionally, the company’s market cap remains substantial, standing at $1.32 trillion.
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