Tesla heading for a 68 percent plunge?

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If you’re looking for all the bearish arguments against Tesla (TSLA), look no further than analyst John Lovallo of Bank of America Merrill Lynch. Earlier this week, he lowered his price target for the electric car maker from $70 to $65 (per Business Insider). That’s 68 percent less than the stock’s trading at right now (around $204)!

Lovallo believes Tesla’s grossly over-valued for one reason: lack of demand. Tsk-tsk, says Tesla CEO Elon Musk. Demand’s not he problem, supply is. Why then, Lovallo wonders, are Tesla’s factories underutilized?

“We now know Tesla is producing at levels that are both well below past run-rates and the company‚Äôs current installed capacity. In other words, Tesla appears to be pulling back on production, which we believe could create the appearance of rising demand”

According to one source, Tesla’s production in Q1 of 2015 looks like it’ll be more than 13 percent lower than production in Q4 of 2014.

In all, Tesla expects to produce 55,000 vehicles in 2015. That’s growth of 57 percent over 2014’s 35,000 cars. Lovallo questions those numbers, and argues that the company’s dragging it’s feet to give the impression that demand’s robust.

Tesla’s demand problem

If you want more proof of demand problems, Lovallo says, look no further than China. Earlier this month, Reuters reported Elon Musk was threatening firings over weak sales in Asia. Per an unnamed source, Tesla sold just 120 cars in all of China in January. That’s well below Tesla’s aggressive targets in the region, and it could be why two of Tesla’s top managers in China left in 2014. Perhaps, there just aren’t enough people who both want the Model S and can actually afford it.

Musk would shrug at those concerns. He says he expects the company to be producing 500,000 cars a year by 2020 and “a few million” cars a year by 2025.

Part of the problem in Asia, of course, could be the fact that the cars cost so much more. The base price in the U.S. starts around $70,000. In China, tariffs, taxes and shipping push the starting price up to roughly $121,000. That’s 72 percent more than the U.S. price!

Lovallo wouldn’t buy that argument. In his mind, there just isn’t enough demand for the Model S at even lower price levels. At least one SeekingAlpha writer agrees:

“Tesla … had around 5,000 cars on hand at 2014 year-end, which for 10,000 deliveries per quarter would already represent 45 days of inventory. Tesla was thus nearing numbers more akin to the typical ‘parking lot stuffed with cars’ automaker.”

In its early days, Tesla billed itself as an on-demand car manufacturer. The fact is, the company’s building up excess inventory. Whether that’s a good thing or bad thing depends on just how much demand truly exists in the market. 2015 should show us whether Musk or Lovallo is right.

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