Tesla Stock’s Latest Risk: EV Overcapacity
Electric vehicles are well on the way to becoming the dominant means of transport for private transport. That should be great news for Tesla
,
But there’s more to making money than just growing demand — there’s also supply.
Some investors, car buyers, and automakers are in varying stages of grieving over the rise of electric vehicles. There’s denial (“The technology won’t work.”), anger (“Regulators did it!”), bargaining (“It’s a niche technology.”) and depression (“I’m not going to give up my sports car.”) and acceptance (“All traditional automakers are pouring billions into electric vehicles, and spending plans are increasing.”)
Regardless of where a voter is located, EVs are a critical mass and there will only be more on the roads every year.
Bloomberg’s renewable energy research arm called BloombergNEF last week updated its EV outlook for 2023. According to this, by 2040, 730 million electric vehicles will be on the roads worldwide. Today there are around 2 billion passenger cars on the roads. Only about 1%, i.e. 20 million, are fully electric.
Taking into account EVs being discarded by their owners (the average car/EV has a useful life of just over 15 years), approximately 800-900 million EVs will be sold over the next 17 years, according to BloombergBNEF forecast. Around 7.5 million pure electric cars were sold worldwide in 2022.
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BloombergNEF projects that 27 million battery electric vehicles will be sold in 2026, representing nearly 40% compound annual growth over the 2022 electric vehicle base.
The main factor in the outlook is the cost. BloombergNEF says electric vehicles will be cheaper than gas-powered cars by the end of the decade “without subsidies…in most cases.” [vehicle] segments.”
In addition, electric vehicles are cheaper to maintain and refuel. Electricity generally costs significantly less than petrol, measured in terms of the total price.
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Of course, gas-powered cars aren’t dead. There will likely be applications where a motor outperforms batteries, but BloombergNEF projects that electric vehicle sales will account for 28% of new car sales in America by 2026. That means around 4 to 4.5 million units, up from around 800,000 units sold in 2022.
That’s all good news for Tesla (Ticker: TSLA), but there’s a risk. Everyone is building EV capacity, and despite high demand estimates, there could be an oversupply by mid-decade.
Benchmark analyst Mike Ward, who tracks North American EV capacity, projects North American EV manufacturers can produce 2.6 million EVs by 2025 and 4.5 million EVs by 2030, excluding Tesla. Including Tesla, based on its existing plants and the announced Mexican facility, it could be up to 4.6 million EVs by 2025 and 7 million EVs by 2030.
Additionally, not every electric vehicle sold in North America is made here. Some are imported. However, when you compare US numbers to North American numbers, don’t forget that the US accounts for about 85% of total light vehicle demand. All told, EV supply could easily outstrip demand by 2025 or 2026.
Overcapacity can lead to lower prices and lower profits in any industry. Tesla cut prices globally in early 2023, in part to spur demand amid mounting competition for electric vehicles. All car manufacturers have to keep huge production facilities running. Otherwise, they become what Elon Musk has dubbed money ovens.
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Investors have not fully embraced the price cuts. Yes, Tesla stock has doubled so far this year, but shares are still about 40% below their all-time closing high of $409.97 on Nov. 4, 2021. And Tesla stock plummeted on April 20 10% after the company reported disappointing earnings margins.
Too much capacity would mean lower profit margins for electric vehicles in the longer term. It’s a risk, but a longer-term risk.
Investors are currently focused on the here and now. Tesla stock posted its 13th straight rise on Tuesday. Good news about EV tax credits, Cybertruck and rising expectations for second quarter deliveries are pushing shares higher.
Shares rose 1.7% in Tuesday trading. The
S&P 500
And
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Nasdaq Composite
are both up about 0.5%.
Write to Al Root at [email protected]