Electric vehicles were supposed to be the answer. Now they are the problem. Investors are reeling, wondering if there is a growth problem for the disruptive tech that auto makers worldwide have embraced.
There are a few key issues to consider. None of them are existential for EVs, but they do mean that all car makers -- even Tesla (ticker: TSLA) -- need to work harder in years to come.
Bad news has been chipping away at investor confidence for a while and a couple of things came Monday that were the proverbial straws breaking e the camel's back. ON Semiconductor $(ON)$, which makes chips that go into cars (more chips going into EVs than traditional cars) provided weak fourth-quarter sales guidance while battery maker Panasonic (6752.Japan) cut its fiscal year 2024 sales outlook.
That followed downbeat updates from this past week from Mercedes-Benz (MBG.Germany) and Volkswagen (VOW.Germany) about slowing EV sales and decisions from Ford Motor $(F)$ and General Motors $(GM)$ to slow their EV-related spending due to weakening demand.
Tesla played its part in the current debacle too. Its third-quarter earnings missed Wall Street estimates and CEO Elon Musk sounded downbeat about growth rates amid rising interest rates and declining vehicle affordability on the company's conference call.
It's a lot. Still, things don't seem all bad. Stellantis $(STLA)$, on Tuesday, reported a 37% year-over-year jump in EV sales in the third quarter and reiterated its goal to have 40% of its sales globally come from all battery electric vehicles.
BEV sales in the U.S. and Europe are up about 50% year to date, and sales in China are up about 20%. BEV sales account for roughly one-quarter of all car sales in China. The penetration numbers in Europe and the U.S. are about 14% and 8%, respectively.
That doesn't seem so bad, but the stock market is forward-looking. New Street Research analyst Pierre Ferragu wrote Monday that a correction is coming and is "likely to hit hard."
The Federal Reserve is partly to blame for the correction, says Wedbush analyst Dan Ives. High interest rates are hurting vehicle affordability, and EVs are still more expensive to purchase up front than traditional cars.
"This is an air pocket after years of white-hot demand...it's not the end of the growth cycle for Tesla and other EV makers," added Ives. "This is a transition phase to the next stage of growth."
Strong growth might not be over, but demand is only one side of the economic equation. Supply matters, too. Sales growth rates are decelerating while the number of EVs on the market is accelerating. In the U.S., more than 35 EV models sold more than 1,000 units in the third quarter. That's up from just over 20 a year ago and less than 15 in the third quarter of 2021.
High supply combined with staleness isn't a good thing for any industry. "We've had the same EVs for some time," says RBC analyst Tom Narayan. The Chevy Bolt and Tesla Model 3, two of the bestsellers in the U.S., have been around since 2016 and 2017, respectively. "There need to be some newer models that are compelling, pricing needs to come down," added the analyst.
He expects that battery costs will fall as U.S. battery-production ramps up. What's more, the $7,500 EV tax credit will be granted immediately at the dealership in 2024. That's an instant benefit to buyers who today have to wait to file a tax return to get the money back.
Still, selling EVs just isn't as easy as it was. "We're in main street people now...early adopters are gone," adds Narayan. That means more work for car companies educating buyers about charging infrastructure, and total cost of ownership.
Narayan doesn't expect EVs to die off as a fad. They're faster, quieter, and cheaper to operate, and, eventually, cheaper to buy, all compelling attributes to him. "The EV versus [internal combustion engine] is like comparing a car to a horse." He rates Tesla and GM stock at Buy with respective price targets of $301 and $48.