Tesla Facing a ‘Significant Demand Challenge’; 2023/24 Numbers ‘Could Be Substantially Revised’

Analysts are continuing to analyze Tesla’s fourth-quarter deliveries report, which was released yesterday. The company’s shares have softened in pre-market trading on Tuesday following a failure to meet average analyst expectations.

Several brokerage firms, including JPMorgan, Truist, and Goldman Sachs, have adjusted their price targets for Tesla stock in light of the disappointing Q4 deliveries report.

JPMorgan has reiterated an Underperform rating on Tesla, suggesting that any future significant misses in deliveries could harm long-term investor confidence, especially since the electric vehicle manufacturer is not expected to face supply issues this year.

Similarly, Bernstein analysts maintained an Underperform rating despite recognizing a more balanced valuation at current levels. Tesla shares dropped 65% in 2022, and analysts assert that the company is grappling with a considerable demand challenge.

They indicated, “We believe that Tesla is facing a significant demand problem, and the book-to-bill ratio in Q4 was probably below 0.65x, despite notable price reductions. This means Tesla’s annual order run rate in Q4, factoring in these discounts, was around 1 million units, while the target for 2023 aims to reach nearly 2 million units without any new models.”

The analysts expect demand issues to persist into 2023, particularly since no Tesla models are currently eligible for IRA rebates, except for the 7-seat Model Y, which has a $3,000 option. They speculate that Tesla may need to lower its growth targets, running factories below capacity, or continue increasing global price cuts, which would put additional pressure on profit margins. Demand issues are anticipated to endure until Tesla can introduce a more affordable model, which may not materialize until 2025.

Furthermore, the analysts consider the consensus estimates for Q4 auto gross margins to be overly optimistic. They estimate that the price reductions during the quarter negatively affected Tesla’s global average selling prices by approximately 3%, or over $1,600 per vehicle. This would typically suggest a nearly 250 basis points drop in auto gross margins. Although the net impact may be lower, the analysts expressed skepticism regarding the consensus forecast that expected a sequential increase of 80 basis points in auto gross margins, reaching 27.6% for Q4.

Tesla stock closed at $123.18 on Friday.