Tesla (TSLA) stock sold off once again on Wednesday, this time over concerns about weaker demand for its electric vehicles not only in the critically important market of China but also in the U.S.
The latest warning comes courtesy of Bernstein analyst Toni Sacconaghi and follows reports earlier this week that Tesla is cutting production of its Model Y midsize SUV at its Shanghai factory by 20% in December.
Tesla denied the reports, but Sacconaghi – and to some extent, the market – sees trouble ahead.
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"Tesla increasingly appears to have a demand problem," writes Sacconaghi, who rates Tesla stock at Underperform (the equivalent of Sell). "The company has responded by cutting prices in China and the U.S. (for December deliveries), and purportedly reducing production in China."
The analyst attributes Tesla's demand problems to a number of issues, including increasing competition from other manufacturers of electric vehicles, a weakening global economy, and "Tesla's narrow (and expensive) product family, which is reaching saturation."
Sacconaghi estimates that price cuts in the U.S. and China will cause Tesla's average selling price to fall by roughly 2.6% or $1,400 per car. That, in turn, will depress the gross margin in Tesla's auto business by an estimated 200 basis points, or 0.2%.
More importantly, the analyst says that Tesla might have to reduce prices repeatedly in the not-too-distant future.
"Given weakness in China, we believe that Tesla will need to make the October 24 price cuts permanent and make further incremental price cuts in order to stimulate demand," Sacconaghi adds.
Tesla stock has lost half its value in 2022, but Wall Street leans collectively toward bullishness on the name. Of the 35 analysts covering TSLA stock tracked by S&P Global Market Intelligence, 13 call it a Strong Buy, eight rate it at Buy, 11 have it at Hold and three call it a Sell.
Their average target price of $279.83 gives Tesla stock an implied upside of about 62% in the next 12 months or so.
As for Tesla's valuation, some market observers – notably Scott Galloway, clinical professor of marketing at the New York University Stern School of Business – argue that TSLA stock is almost uniquely overpriced.
Basic metrics, however, are more forgiving. For example, Tesla stock trades at 31.4 times analysts' 2023 earnings per share (EPS) estimate, per S&P Global Market Intelligence. That's by no means cheap – but one could argue that it's not an unreasonable premium to pay for a company that's forecast to generate average annual EPS growth of almost 29% over the next three to five years.
Tesla CEO Elon Musk's controversial takeover of Twitter also factors into Tesla stock's valuation. On a fundamental level, Musk's sale of some of his Tesla stock in order to help fund his purchase of the social media site added to downward price pressure on TSLA. Musk's antics and controversial statements as Twitter's owner also have at least indirect effects on both Tesla stock and public perceptions of the brand.
Such factors don't fit neatly into analysts' spreadsheets, but they are indeed real. CFRA Research analyst Garrett Nelson, for one, acknowledges the distractions caused by Tesla's mercurial CEO.
"TSLA's share price performance has been hurt by the incessant noise surrounding Twitter since Elon Musk completed his acquisition in late October, but we believe concerns regarding additional stock sales by Musk are overblown," writes Nelson, who rates Tesla stock at Strong Buy.
The analyst adds that he's bullish on demand for the forthcoming Tesla Semi, a fully electric semi-truck, and forecasts EPS growth of 40% in 2023.
"We also see an increased likelihood of a stock buyback announcement in the range of $5 billion to $10 billion following TSLA's selloff," Nelson says.
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