Guggenheim Remains Sidelined on Tesla, Following Weak 3Q Volumes

By Michael Elkins 

Guggenheim reiterated a Neutral rating on Tesla (NASDAQ:) after the electric vehicle company reported weaker-than-expected 3Q volume. Guggenheim Analysts further examined the automaker’s potential demand issues in China, and whether those issues could spill over into the US and European markets.

Tesla’s wait times in China have rapidly declined in recent months, going from 20+ weeks at the peak this summer to 1 to 4 weeks more recently. While Guggenheim thinks ramping supply out of TSLA’s Shanghai factory explains part of the wait time normalization, the analysts believe that weaker demand is also a key factor.

The analysts wrote in a note, “While the company doesn’t break out deliveries by region and blamed the 3Q shortfall on logistics issues, we believe China was the primary driver of the miss and that TSLA was unable to sell all the vehicles they produced in China domestically in September.”

The analysts’ view is based on several factors, including the rapid decline in China wait times. Another factor is the modest incentives from Tesla for deliveries taken by end of quarter with TSLA insurance. The offering suggests the company is trying support demand late in the quarter. Also, there are reports that the company is shifting to exporting Shanghai-produced vehicles outside the country earlier than usual, suggesting domestic demand was softer towards the end of the quarter.

One of the potential explanations for Tesla’s shorter wait times and weaker demand might be due to growing competition. TSLA is facing broad-based competition from domestic EV manufacturers in China that have scaled quickly in recent years, but Guggenheim sees BYD as the biggest threat. BYD overtook TSLA as the BEV market leader in July 2021, and their market share continued to grow his year when they launched the BYD Yuan. Notably, the price delta between TSLA and BYD’s higher end vehicles are not significant, but the Yuan significantly undercuts the TSLA Model 3 and Y.

TSLA wait times remain long in the US and Europe across their most positive vehicle trims. Wait times in the US currently extend into 2023 for the Model Y LR. In Europe, wait times also generally range from late this year to early next year, which provides some visibility to support any softening demand from a global economic slowdown.

The analysts wrote that “Importantly, given that TSLA is positioned to be an outsized beneficiary of the new Inflation Reduction Act (IRA) EV sales credits starting next year, we are not as concerned about the modest wait time/demand normalization in the US. Furthermore, we would note that US competition still lacks scale to take sufficient share in the near-term like we have seen in China. That said, we see more risk in Europe given that region shares similar characteristics to China (ramping competition, weak macro, growing supply), and see greater risk that the region quickly flips from being undersupplied to at least adequately supplied in coming quarters. We would note, however, that relative to China, in Europe there is more flexibility at the country level to move units around, competition is less intense, and TSLA vehicles are less expensive by European standards. So overall, while we are monitoring wait times closely in Europe given the quick reversal we have seen in China, we believe the region is in a better position on a relative basis to avoid oversupply risk.”

Shares of TSLA are down 4.43% in mid-day trading on Friday.

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