Wall Street is souring on Tesla's pivot away from low-cost vehicles towards autonomous driving

"We view Tesla's shift as thesis-changing, and worry the stock will need to undergo a potentially painful transition in ownership base."

• Tesla is losing the confidence of Wall Street amid reports it's pivoting from a low-cost Model 2 to robotaxis.
• Deutsche Bank just downgraded Tesla's stock and Barclays cut its price target. Both see double-digit declines over the next year.
• "We view Tesla's shift as thesis-changing, and worry the stock will need to undergo a potentially painful transition in ownership base," Deutsche Bank said.

Another day, another negative Tesla note from Wall Street.

Tesla has come under intense scrutiny from sell-side analysts after a Reuters report from earlier this month said that the EV maker was shifting away from its low-cost Model 2 vehicle to instead focus on building a fully-autonomous robotaxi.

Deutsche Bank downgrades Tesla

Deutsche Bank analyst Emmanuel Rosner is not impressed with the potential pivot, calling it "thesis-changing" for investors in a note on Thursday.

Rosner downgraded Tesla stock to "Hold" from "Buy" and cut its price target to $123 from $189, suggesting potential downside of about 19% from current levels. 

"Pushing out Model 2 will create significant earnings and FCF pressure on 2026+ estimates, and make the future of the company tied to Tesla cracking the code on full driverless autonomy, which represents a significant technological, regulatory and operational challenge," Rosner said. 

Rosner slashed his 2027 earnings per share estimate for Tesla to $2.40 from a prior estimate of $4.25, and added that there could be further downside to the company's earnings power if they completely abandon the development of a low-cost vehicle. 

"The delay of Model 2 efforts creates the risk of no new vehicle in Tesla's consumer lineup for the foreseeable future, which would put continued downward pressure on its volume and pricing for many more years, requiring downward earnings estimate revisions for 2026+," Rosner said.

Tesla stock fell 2% in early Thursday trading, and is down nearly 40% year-to-date. 

Perhaps the biggest risk to Tesla, aside from lower earnings, is the idea that a pivot to robotaxis could cause a complete recalibration of its underlying shareholder base.

"We view Tesla's shift as thesis-changing, and worry the stock will need to undergo a potentially painful transition in ownership base, with investors previously focused on Tesla's EV volume and cost advantage potentially throwing in the towel, and eventually replaced by AI/tech investors with considerably longer time horizons," Rosen said.

Barclays cuts Tesla price target

It's not just Deutsche Bank that has soured on Tesla.

Barclays slashed its Tesla price target on Wednesday by 20%, and said it expects the company's first-quarter earnings call next week to be a negative catalyst.

Calling it "one of the most widely anticipated calls ever," Barclays analyst Dan Levy said the company is facing challenging near-term fundamentals in combination with a longer-term "investment thesis pivot" as it considers moving away from the Model 2.

According to Levy, if Tesla is indeed moving away from the Model 2, that would be bad news for the stock valuation going forward, calling it a "clear net negative for the Tesla investment thesis."

"It casts significant uncertainty on the path ahead for Tesla, making success of the stock dependent on bets with seemingly binary outcomes," Levy said. "Indeed, we are hard pressed to think of any other precedent of a company of Tesla's size basing its path of success on such binary bets."

Wedbush also concerned about Model 2 pivot

Even long-time Tesla bull Dan Ives is worried about Tesla's potential pivot away from a low-cost Model 2.

In a note from last week, Ives said Tesla needs to commit to its Model 2 development plans if it wants to have any chance in reversing this year's painful stock price decline. 

"If robotaxis is viewed as the 'magic model' to replace Model 2 we would view this as a debacle negative for the Tesla story. It would be a risky gamble if Tesla moved away from the Model 2 and went straight to robotaxis," Ives said.

Ives said Wall Street's criticism of Tesla is warranted, especially given the fact that the EV maker has seen declining profit margins and its first year-over-year sales decline since 2020.

"For Musk, this is a fork in the road time to get Tesla through this turbulent period otherwise dark days could be ahead," Ives said.