Tesla has had a 'nightmare' first quarter amid weak China demand

By Ciara Linnane and Claudia Assis

Wedbush's Dan Ives trims his stock-price target to $300 from $315 after 'perfect storm' of issues, while Deutsche Bank cuts sales estimates again

Tesla Inc. is facing a "white-knuckle period" as China demand remains soft and is expected to weigh on first-quarter deliveries, which are due to be reported in the coming days, Wedbush analyst Dan Ives said Thursday.

The longtime Tesla (TSLA) bull said the electric-vehicle maker has had a "nightmare" quarter amid a perfect storm of demand issues that have sent consensus expectations sharply lower.

Also on Thursday, Emmanuel Rosner at Deutsche Bank again cut his expectations for Tesla deliveries, the EV maker's proxy for sales, on similar concerns.

Tesla reports deliveries a few days after the end of the quarter and could report first-quarter numbers as early as Monday. The FactSet consensus calls for the delivery of 457,000 Tesla EVs, compared with 423,000 vehicles in the first quarter of 2023 and down from the 494,000 that were expected as of late January.

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"While supply issues (factory planned downtimes/Berlin fire) has impacted supply, there is no denying this has been a quarter to forget for [Chief Executive Elon] Musk and Tesla," Ives wrote in a note to clients, referring in part to a Tesla plant in Germany that shut down after a fire in early March.

Wedbush reiterated its outperform rating on Tesla's stock but trimmed its price target to $300 from $315, which is still 67% above the current price.

At Deutsche Bank, Rosner said that the reduced estimates of 414,000 vehicles, down from a previous expectation of 427,000 vehicles, were mostly on weaker-than-expected China sales and planned production cuts in that country.

Rosner also cut his 2024 deliveries estimate to about 1.9 million vehicles, while the consensus is for around 2.06 million vehicles. There's continued pressure on margins and earnings, as the company announced "deep" price cuts in China and Europe earlier in the quarter and made other price adjustments in February to boost sales.

"Although Tesla has announced it will raise prices in the U.S. and China effective April, we view it as an attempt to boost sales in March, rather than a sign of solid demand," Rosner said.

At Wedbush, Ives said that China is the company's biggest challenge as competition heats up and a price war lingers, and that Tesla will grapple with it through 2024.

Wedbush is now expecting China deliveries to be down 3% to 4% in the quarter from the same period a year ago. Ives expects the sales numbers to be released on Tuesday, "and this will be not be a moment of celebration for the bulls and instead be a rip-the-Band-Aid quarter for Tesla investors."

The Tesla narrative is as negative as it has been in the last few years, with Musk and the company being attacked by bears from all directions, Ives said, adding that this time it's justified, because growth has been sluggish and margins are showing compression thanks to China.

"For Musk this is a fork-in-the-road time to get Tesla through this turbulent period, otherwise darker days could be ahead," he said.

Wedbush remains bullish on the company's full-self-driving/autopilot technology and believes that it is a key plank of the disruptive-tech story. But patience among investors is wearing thin and is being exacerbated by Musk's comments on building artificial-intelligence systems outside of Tesla, by issues with how the board of directors is using its oversight powers, by a Delaware court's decision to nullify Musk's compensation package and by a likely move to reincorporate in Texas, Ives said.

See also: Nullification of Elon Musk's $56 billion pay package could be a wake-up call for corporate boards

To turn the story around, Musk needs to offer a formal range for margins and deliveries in 2024, address on the conference call the issues in China and a strategy to reverse the trend, hold a battery/AI day to give investors the full roadmap, commit to being CEO of Tesla for the next three to five years and start a real ad campaign, he wrote.

Read also: Tesla joins forces with Chinese battery maker CATL, and it's a 'game-changer' for this analyst

Wedbush is still bullish over the medium term and expects the company to maintain its stronghold in the EV market.

"However, getting through this white-knuckle period will be a defining chapter for Musk & Co. and the future of Tesla," Ives said.

Tesla's stock was down nearly 2% on Thursday. It is down 6% over the last 12 months, while the S&P 500 SPX has gained 32% in that period.

See also: What's behind Tesla's stock rally? A short test drive.

-Ciara Linnane -Claudia Assis

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03-28-24 1207ET

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