This content does not constitute investment advice. The author currently holds no positions in any of the stocks discussed herein.
The Future Outlook for Tesla Amid Challenging Market Conditions
As Tesla prepares to navigate a significant reduction in one of its primary revenue streams, Wall Street has ramped up analysis to chart a prospective course for the company. Financial analysts, particularly from Wells Fargo, are closely examining the implications of these developments on Tesla’s future.
Wells Fargo Analyst Downgrades Tesla’s Rating
Colin Langan, an analyst from Wells Fargo, has reiterated an ‘Underweight’ designation for Tesla shares, assigning a target price of $120 per share. Langan’s projections indicate that Tesla may report a second-quarter earnings per share (EPS) of approximately $0.20, significantly below the consensus forecast of $0.41. This anticipated shortfall largely stems from decreasing earnings generated from electric vehicle (EV) credits and the erosion of margins within Tesla’s energy sector.
Declining Margins and Tariff Impact
Wall Street analysts expect a notable decline in Tesla’s energy margins, forecasted to drop from 29% to 24%, primarily influenced by tariffs imposed on imports from China. Conversely, the automotive gross margin—excluding credits—is projected to improve slightly to 13%, recovering from a low of 12.5% in the previous quarter, which was impacted by heightened warranty expenses.
Impending Changes in Federal Tax Credits
A key point in Langan’s analysis highlights the implications of the reduction in federal tax incentives available for EV purchases and solar energy systems, scheduled to conclude on September 30th and December 31st, respectively. This change is attributed to the ‘Big Beautiful Bill’ initiated during the Trump administration. Langan anticipates a surge in deliveries in Q3 as consumers rush to take advantage of the existing incentives, followed by a sharp decline in Q4 performance. He remarks:
“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 price 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.”
Implications of Regulatory Credit Changes
Further complicating matters, the legislative changes have severely reduced demand for Zero Emission Vehicle (ZEV) regulatory credits by removing penalties for automakers falling short of federal Corporate Average Fuel Economy (CAFE) mandates. Langan notes that these credits contributed roughly 32% of Tesla’s projected EBIT for 2024. Additionally, regulatory credits from California Air Resources Board (CARB) states made up around 50% of Tesla’s regulatory credit sales.
As a result, he foresees a decline of $170 million in Tesla’s regulatory credit sales from Q1 to Q2. Once ZEV credits are phased out in Q3, Langan expects Tesla’s overall regulatory credit income to drop dramatically by 50%, leaving primarily Greenhouse Gas (GHG) and EU credits—whose value may further diminish as the EPA eases emissions standards.
The decrease in regulatory credits is expected to reduce the unit price from approximately $1, 800 each in Q1 to just $900 by Q3/Q4.
Additional Concerns: Tariffs on Battery Costs
Langan concludes with a notable observation on the impact of tariffs on Tesla’s energy generation business. The company relies on lithium iron phosphate (LFP) batteries sourced from China, which have been subject to tariffs that averaged around 70% in Q2, and recently adjusted to approximately 30%.Given that batteries constitute about 50% of the cost of goods sold for Tesla’s energy generation division, this could lead to a significant decline in margins—from 26% down to 15% by 2025 under the current tariff scenarios.
“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.”
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