Bank of America Merrill Lynch cuts Tesla's target share price, saying weak demand will hurt the company unless it cuts prices further

• Bank of America cut its price target for Tesla on Wednesday as the company's first-quarter deliveries plunged.

• The bank said it was concerned about weakening demand for electric cars as Tesla's inventory grows.

• "We believe that it will be difficult for the company to generate additional sales volume with its current product set or without further price reductions.

Bank of America lowered its price target for Tesla stock as worries about potential demand problems for electric cars intensified.

In a note Wednesday, the bank set a new price target of $220, down 21% from its previous target of $280. While the bank rates Tesla "Neutral," the price target represents 28% of upside to Tesla's stock price based on previous levels.

The downgrade of Tesla's target stock price comes a week after the company announced first-quarter deliveries that were significantly below Wall Street's expectations.

Tesla blamed supply disruptions for the weaker-than-expected first-quarter deliveries, including a fire at its Berlin plant and a shutdown of production of the new Model 3 at its Fremont plant, while the Bank of America partly blamed a drop in demand for the product.

"The main reason for the increase in inventories and the weakness in deliveries in the first quarter appears to be the decline in demand for EVs across regions, particularly in North America, where EV sales have been essentially flat since the summer of 2023," the bank said.

To jumpstart growth, Tesla will either need to update its product lineup or start cutting prices again.

"We believe that Tesla will face increasing margin pressure from weak demand. Unless Tesla opens up new geographic markets, we think it will be difficult for the company to increase sales with its current lineup or without further price reductions.

The Cybertruck is not expected to be a high-volume model compared to the strong-selling Model 3 and Model Y, and its lower-priced models seem to be a long way off.

"This makes pricing the main lever to stimulate demand (which, we note, has not worked well so far). Volume growth remains one of the company's key priorities, which means more price discounting is likely.

Finally, one of the risks Tesla faces is that it sells directly to consumers, rather than relying on a network of dealers. This means that Tesla has a growing inventory of cars on its books, which could put pressure on the company if the inventory can't be cleared.

In the first quarter, Tesla produced 46,561 more cars than it sold, and Bank of America estimates that the company's stockpile accumulated about 150,000 vehicles.

We think it is unlikely that the company will be able to manage higher levels of inventory," Bank of America said, adding that the risk of Tesla's high-volume models being reduced in 2024 is real.

Tesla shares fell 31 TP3T on Wednesday and are down 311 TP3T so far this year.

Read the original