On Monday, Bank of America Merrill Lynch analyst John Lovallo published a devastating research note about Tesla.
He cut his target price for the electric-car manufacturer to $US65 from $US70 and insisted that the bull case for Tesla, currently trading at $US217, doesn’t hold water.
We have long contended that Tesla’s primary challenge is a lack of demand for its [electric vehicles.] Tesla’s management and the bulls consistently argue that the company can stimulate demand at will and that the true issue is capacity and supply. In our view, this optimistic thesis has been largely debunked, given that we now know Tesla is producing at levels that are both well below past run-rates and the company’s current installed capacity. In other words, Tesla appears to be pulling back on production, which we believe could create the appearance of rising demand. [Emphasis added.]
Lovallo is among the Tesla bears, with a price target for the stock that’s miles below the Wall Street bulls. He has an “underperform” rating on the stock.
But his note focuses remorselessly on one of Elon Musk’s key selling points, which the CEO made as Tesla struggled over the second half of 2014 to validate its lofty market cap, now at $US27 billion.
Again and again, Musk has said that Tesla doesn’t have a demand problem — rather, it can’t build enough cars to keep up with demand and doesn’t want demand to get out of control, as the company is very concerned about making customers wait for cars.
The assumption among the bulls has been that Tesla will soon fire up production to aggressive levels and begin to steadily crank out tens of thousands of new cars. Musk himself has projected that production in 2015 will rise to 55,000 vehicles, up from 2014’s 35,000.
Lovallo couldn’t be more strongly questioning that prediction.
Tesla recently reported fourth-quarter and full-year 2014 earnings, which were a significant miss. The company also failed to deliver roughly 1,400 cars in 2014, pushing those deliveries into early 2015.
The stock thus far hasn’t been punished. But shares are down substantially from their 2014 peak of $US292.
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