Tesla Is Still Wall Street’s Favorite Car Company

None of that has deterred analysts who follow the company. In fact, 64% of analysts covering Tesla have “buy” or “overweight” ratings for its stock, according to

FactSet.

That is the highest share since the end of 2014, according to the data provider.

The analysts have a median target price of $194 for Tesla. Tesla shares closed at $143.75 Monday, 26% below that level.

Investors and analysts will get a closer look at how Tesla did in the final three months of the year on Wednesday when the company reports its fourth-quarter results.

What is making analysts so optimistic about Tesla’s prospects?

The short answer is that many believe Tesla, for all its controversy, remains the most dominant player in the electric-car industry.

Sales of electric cars in the U.S. jumped last year, even as total U.S. auto sales fell 8%, according to market-research firm Motor Intelligence. Although legacy car companies such as Ford Motor Co., General Motors Co. and Hyundai Motor Co. have rolled out more of their own electric models in recent years, they have continued to trail behind Tesla. Mr. Musk’s company accounted for 65% of electric cars sold in the U.S. last year, according to Motor Intelligence.

“Despite lowering estimates and reported production cuts, we continue to believe [Tesla] is the best positioned EV maker in both the near and long term,” Ben Kallo, senior research analyst at Baird, said in a December note on the company.

Other analysts believe the stock has fallen too much, given its potential for further growth.

Tesla is “way oversold,” Wedbush Securities analysts

Daniel Ives

and John Katsingris wrote in a January note.

Tesla’s recent price cuts may help boost demand for its vehicles in key markets such as China, Mr. Ives said in a separate note. The analyst, who conducted a survey of 500 electric car buyers in China, said he found that nearly 70% of respondents said they were more likely to purchase a Tesla Model Y because of lower prices.

The price cuts “have been a home-run success out of the gates,” he said.

Still, even those who believe in Tesla’s dominance in the electric-car industry caution that its stock isn’t in the clear.

As with many other growth stocks, Tesla soared during the pandemic, only to then tumble last year after accelerating inflation forced the Federal Reserve to swiftly raise interest rates. In the past few weeks, though, investors have grown more hopeful that the Fed will pivot from raising rates to cutting them by the second half of the year. That has fueled a comeback among many growth stocks—Tesla included. Shares, while still down substantially from their 2021 high, are up 17% this year, compared with the S&P 500’s 4.7% gain.

Skeptical investors have warned that the market is at risk of a reversal if inflation proves to be more persistent than expected, and the Fed keeps monetary policy tight longer.

Many economists also believe the U.S. is likely to enter a recession some time this year. Rising interest rates, combined with an economic downturn, will likely damp consumer spending, Mizuho Securities USA LLC analysts said in a January note. (The team kept its “buy” rating on the stock anyway, citing its belief that Tesla will continue to be a global leader in the electric-car industry over the long term.)

Tesla also faces the risk that controversy over Mr. Musk’s handling of Twitter continues to be a major overhang for its stock, said Oppenheimer & Co. analysts in a December note.

The analysts, who lowered their rating for Tesla to “perform” from “outperform,” cited backlash from advertisers and users on Twitter following Mr. Musk’s takeover of the social-media platform. 

The company’s technological prowess may be “outweighed by negative publicity leading to additional volatility,” the analysts warned.

The cautionary notes have done little to dull enthusiasm among longtime Tesla investors. 

“We are as bullish about Tesla as we have ever been,” ARK Investment Management founder

Cathie Wood

said Thursday on a webinar. Tesla is the third biggest holding in Ms. Wood’s flagship ARK Innovation Fund, which is invested in companies that she believes are at the forefront of “disruptive innovation” in their industries. 

She added that she believes Tesla shares could rise fivefold over the next five years.

Write to Akane Otani at [email protected]