Stock in Tesla and other auto makers took a hit on Monday following a disappointing forecast from automotive chip maker ON Semiconductor. The company reported third-quarter sales of $2.18 billion, slightly surpassing analysts’ expectations of $2.15 billion. However, ON Semiconductor’s management projected fourth-quarter sales of approximately $2 billion, falling short of Wall Street’s estimate of $2.2 billion.
This announcement caused a decline of about 19% in ON Semiconductor’s stock during midday trading. Meanwhile, the S&P 500 and Nasdaq Composite experienced slight gains of 0.5% and 0.6% respectively.
Tesla shares fell by 3.9%, hovering just below $200 per share, while Rivian Automotive stock saw a decline of 1.8%. Ford Motor shares dropped by 1.2%, whereas General Motors shares managed to eke out a 0.2% gain after the company reached a tentative labor agreement with the United Auto Workers Union.
The reason auto stocks were affected by ON Semiconductor’s results is that they imply a slowdown in electric vehicle (EV) sales. ON Semiconductor produces power management products, which play a crucial role in battery-powered cars.
Investors are left wondering whether ON Semiconductor’s projections reflect a chicken-or-egg situation – are declining EV sales impacting the chip maker’s outlook, or is ON Semiconductor’s cautious call contributing to weakened EV demand?
It remains to be seen how these developments will shape the performance of auto stocks in the coming months.
The Slowdown in EV Sales and Its Impact on Automakers
Both Ford and GM have recently postponed large investments in electric vehicle (EV) production, citing economic conditions and a decline in EV demand. Volkswagen also issued a warning about slowing orders for EVs. As a result, Tesla’s stock fell by 9.3% after CEO Elon Musk expressed concerns about high interest rates negatively affecting demand during the company’s third-quarter report.
Although global EV sales have continued to rise this year, showing an increase of approximately 30% to 40% compared to the same period in 2022, the rate of growth appears to be slowing down. While the growth rate was around 50% last year, it is now expected to be around 20% to 25%.
It is unclear whether ON’s pessimistic outlook is solely influenced by the auto makers’ warnings or if it indicates further challenges ahead for EV sales. Regardless, investors are growing increasingly worried about the situation.
According to New Street Research analyst Pierre Ferragu, “Expect the correction in autos to worsen and play out over the next six months,” in a recent report following ON’s earnings results.
So, what could potentially reverse this trend? Lower interest rates would certainly make all cars more affordable, but the Federal Reserve does not seem inclined to cut borrowing costs in the near future. However, there will be a change in government incentives that could benefit the industry starting next year. The $7,500 purchase-tax credit for qualified EV buyers will now be deducted from the car’s price directly at the dealership from 2024 onwards, eliminating the need to wait for a tax return to enjoy this benefit.
As of midday trading, Tesla’s stock has experienced a 12% decline over the past 12 months, while Rivian shares have fallen by approximately 55%. In contrast, the S&P 500 has risen by about 7%.
In conclusion, the EV market is facing challenges as automakers defer investments and demand moderates. However, potential solutions such as changes in government incentives and lower interest rates could help revitalize the industry in the future.