Wall Street starts to turn cautious on Tesla with two downgrades as shares near $500

Published Thu, Jan 9 20208:35 AM ESTUpdated Thu, Jan 9 20204:07 PM EST

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

Two Wall Street firms lowered their ratings on Tesla , backing away from Elon Musk's electric automaker after its recent swift share climb. The stock has doubled in the past three months, up 101% in a run fueled by optimism about its vehicle deliveries, expanding production and overall profitability. Baird downgraded Tesla to neutral from outperform on Thursday before the bell, while CFRA downgraded Tesla to sell from hold after the bell Wednesday. Bernstein technology analyst Toni Sacconaghi also said the stock's run-up may have gone too far. "We have become incrementally cautious on the stock, given its huge recent surge in price," Sacconaghi said in a note to investors Thursday. Although Bernstein did not change its rating or price target, Sacconaghi warned that Tesla's fourth-quarter results have "the potential for weaker margins" while the first-quarter may see "softness" after the elimination of subsidies in the U.S. and the Netherlands. Bernstein has a market-perform rating on the stock. Tesla shares closed heavy trading Thursday down 2.2% at $481.34. The stock opened trading up as much as 1%, nearing $500 a share, before later reversing and falling. Baird recommended that investors take profits after Tesla's recent stock run. "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," Baird analyst Ben Kallo said. Baird also raised its price target to $525 a share from $355 a share, just 6% above the stock's current levels. CFRA believes Tesla is "fully valued" after its run-up, noting that the stock bottomed at about $177 a share only seven months ago. "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 analyst Garrett Nelson said. "We also see heightened risk of equity issuance, which would help de-risk the balance sheet but be dilutive to EPS." Nelson added that Tesla's market capitalization now exceeds the combined value of General Motors and Ford , "despite having only about 3% of joint vehicle sales volume." CFRA stuck by its price target of $400 a share, expecting a nearly 19% drop in Tesla's stock. While Sacconaghi's note focused on the advantages of Tesla's direct distribution model, he stuck by his $325 price target – which is about 34% below Tesla's current price. The analyst said Bernstein sees Tesla's direct distribution sales model becoming an advantage over traditional automakers but that those benefits would be seen over the long term. – CNBC's Michael Bloom contributed to this report.

Elon Musk, chief executive officer of Tesla Inc., speaks during the Tesla China-Made Model 3 Delivery Ceremony at the company's Gigafactory in Shanghai, China, on Tuesday, Jan. 7, 2020.

Qilai Shen | Bloomberg | Getty Images

Two Wall Street firms lowered their ratings on Tesla, backing away from Elon Musk's electric automaker after its recent swift share climb.

The stock has doubled in the past three months, up 101% in a run fueled by optimism about its vehicle deliveries, expanding production and overall profitability.

Baird downgraded Tesla to neutral from outperform on Thursday before the bell, while CFRA downgraded Tesla to sell from hold after the bell Wednesday. Bernstein technology analyst Toni Sacconaghi also said the stock's run-up may have gone too far.

"We have become incrementally cautious on the stock, given its huge recent surge in price," Sacconaghi said in a note to investors Thursday.

Although Bernstein did not change its rating or price target, Sacconaghi warned that Tesla's fourth-quarter results have "the potential for weaker margins" while the first-quarter may see "softness" after the elimination of subsidies in the U.S. and the Netherlands. Bernstein has a market-perform rating on the stock.

Tesla shares closed heavy trading Thursday down 2.2% at $481.34. The stock opened trading up as much as 1%, nearing $500 a share, before later reversing and falling.

Baird recommended that investors take profits after Tesla's recent stock run.

"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," Baird analyst Ben Kallo said.