A week ago, Tesla announced its first quarter delivery numbers, which fell significantly below Wall Street and market expectations. Despite Tesla's explanation that the primary reason for the decline in deliveries was supply chain disruptions, including a fire at its Berlin factory and a decrease in production of the new Model 3 at its Fremont factory, among others.
However, this justification did not gain acceptance. Bank of America attributed the decline in deliveries to a drop in product demand rather than production decrease. A decline in product demand is critical for a company facing fierce competition, and thus Bank of America is very pessimistic about Tesla’s outlook.
Recently, Bank of America updated its price target for Tesla. Although its rating for Tesla remains "neutral" and has not decreased, the price target was significantly reduced from $280 to $220, a decline of 21%. This reflects Bank of America's concerns about the potential demand for electric vehicles, indicating that simply increasing production will not raise profits. Instead, alternative channels and approaches are needed, such as introducing new products or price promotions.
Bank of America’s judgment on Tesla's delivery volume decrease is: "First quarter inventory increased, seemingly indicating that the main driver for the delivery decrease was a drop in electric vehicle demand across regions, especially in North America, where EV sales have been essentially flat since the summer of 2023."
Tesla's problems are not just related to a decrease in delivery volumes but also to inventory backlog leading to financial pressure. Because Tesla adopts a direct sales model and doesn’t distribute products to dealerships, inventory poses a significant pressure. In the first quarter of this year, Tesla's vehicle production exceeded sales by 46,561 units. Bank of America estimates that the company's total inventory accumulation is about 150,000 units.
Bank of America states: "We believe it is unlikely that Tesla will effectively manage significantly higher inventory levels." It also added that the risk of reduced production of Tesla’s mass-market models in 2024 is real, meaning that to compensate for the inventory pressure in the first quarter of 2023 and 2024, Tesla could only reduce production, and the immense inventory pressure is also plunging them into the dilemma between new and old product lines.
Currently, Tesla's share price has fallen to 171 (as of April 11, 2024), which according to Bank of America’s estimates, still has some room for growth. However, if the current situation does not improve, Bank of America might once again lower the price target or rating.
