As Bernstein analyst Toni Sacconaghi wrote in a note to investors on Tuesday, Tesla's (TSLA 0.45%) first-quarter deliveries were "brutal." Deliveries fell about 9% year over year and 20% sequentially.
These poor results likely have many investors reevaluating their investment theses on the stock. While some may excuse this lull in Tesla's sales in anticipation of a potential reacceleration in the electric-car company's vehicle-delivery trends in future quarters, others may conclude it's a reason to avoid the stock.
Sacconaghi was one of several analysts who, following the company's quarterly vehicle production and delivery report, pointed to a 12-month price target significantly below the stock's current price, even though shares have already dropped more than 30% in 2024. Specifically, the firm reiterated an underperform rating for the stock and a $120 12-month price target.
Another analyst with a notably low price target was JPMorgan analyst Ryan Brinkman. Following Tesla's worse-than-expected first-quarter deliveries, Brinkman lowered his 12-month price target for the stock from $130 to $115.
These two analysts' price targets represent about 28% to 31% downside from where the stock is trading today. Let's look a bit more closely at what's behind their bearish views.
The bear case
The two analysts cited Tesla's worse-than-expected first-quarter deliveries as the primary reason for their bearish views on the stock. First-quarter total deliveries were estimated to come in at 386,810 -- down from 422,875 in the year-ago quarter. Analysts, on average, were expecting deliveries of about 457,000.
Brinkman said the underwhelming quarter puts Tesla's premium valuation at risk, as shares currently trade at about 39 times earnings. A valuation multiple like this prices in rapid growth in earnings in the years ahead. Yet the current consensus from analysts is for Tesla's earnings per share to decline about 39% this year. Indeed, the average analyst forecast doesn't anticipate Tesla returning to 2023 earnings-per-share levels until 2026.
Meanwhile, Sacconaghi called out the widening difference between Tesla's quarterly production and deliveries. He predicted this is creating a significant inventory build-up that's likely to show up in Tesla's first-quarter earnings report as a headwind to free cash flow.
What should investors do?
Tesla's declining sales certainly paint a dismal picture for the company and the stock -- particularly considering the pricey valuation at which it trades. But some context makes the situation seem less dire.
The primary culprit for Tesla's sales decline likely has less to do with its products and more to do with the high-interest-rate environment the company is operating in. With about 80% of new and used car purchases financed in the U.S., high interest rates translate to higher monthly payments. This ultimately puts a big drag on demand for new-car sales -- especially when compared to the extremely low-interest-rate environment Tesla benefited from in recent years.
Fortunately, the high-interest-rate environment we find ourselves in today could prove to be temporary. Once the Federal Reserve achieves its goal of getting inflation under control, the central banking system will likely proceed with gradual reductions in interest rates over time. If this happens, it would likely be a material catalyst for Tesla's car sales.
Still, Tesla stock's valuation is arguably too high today to justify buying shares at this time.
For now, investors should consider staying on the sidelines. Sure, there's always a chance that Tesla will end up justifying its stock's current valuation by returning to significant and sustained growth soon. But since it's unclear when deliveries will reaccelerate and how significant that reacceleration will be, it may make sense to avoid investing in the stock at its current valuation.
