The U.S. automobile industry has lost the momentum that it had started to gain in the first half of 2021. That’s largely due to the persisting shortage of semiconductors and other supply chain challenges, which has led to stretched automobile prices.
September saw a 26% decline in U.S. auto sales, with only around a million units sold by all automakers together, according to Edmunds.com. Moreover, the global automobile industry is expected to suffer an impact of about $210 billion in revenues due to the continued chip shortage, as projected by consulting firm AlixPartners.
However, going by the delivery numbers that Tesla (TSLA) released recently, it seems like the chip shortages have spared the company significant losses in unit sales. It is interesting to note that Tesla delivered 241,300 vehicles during the third quarter of this year, at a growth rate of 73% year-over-year, while units delivered declined across most other major automobile players like General Motors (GM) and Ford (F).
Nonetheless, there are a few thorns here and there that are pricking into Tesla’s growth potential. Recently, Needham analyst Rajvindra Gill observed some adversities in the company’s operations, which prompted him to reiterate a Sell rating to the stock. (See Top Smart Score Stocks on TipRanks)
Gill expressed concerns about the lower-than-expected delivery of Tesla’s Model S/X. He earlier believed that production of the Model S/X was slow only temporarily, due to re-tooling activities ahead of a model refresh. However, the slowdown has been persisting for 9 months now and Tesla has not come up with an explanation.
A continued low level of Model S/X production might mean that Tesla is diverting its electric components to Model 3/Y production, which would perpetuate the problem of low levels of production for its higher-end model.
Moreover, the Model S/X has a higher ASP (average selling price) than the Model 3/Y. Therefore, a slowdown in the higher ASP vehicle production is bound to affect the company’s bottom line.
Gill seems skeptical about Tesla’s near-term prospects. “Although we are not yet changing our estimates as we do not have the full financials for the quarter, if we were to keep all of our assumptions the same (ASPs, gross margins, and operating expenses), we would expect sales and EPS to be lower,” noted the analyst.
The analyst did not lower his estimates yet, but he did express his expectations. He sees lower revenue estimates for 2021 and 2022 by 3% and 5%, respectively. He also expects lower earnings per share for 2021 and 2022, by 6% and 8%, respectively. Gill believes that producing and selling more Model 3/Ys cannot compensate for the loss of revenues realized from low production and delivery of the Model S/X.
These apart, Tesla’s OpEx-hungry Gigafactory in Shanghai and (soon-to-be) in Europe are making things worse for the company’s operating margin. Moreover, competitive pricing pressure and ramp of low-ASP vehicles are making Gill wonder whether the profitability achieved by the company over the past 4 quarters is at all sustainable.
The company is also likely to experience obstacles during the manufacturing of Model Y and Cybertruck, as observed by Gill.
The analyst believes that the company is currently overvalued, and recommends investors book their profits off the stock.
The Wall Street consensus also remains cautious with a Hold rating, based on 12 Buys, 7 Holds, and 7 Sells. The average Tesla price target of $690.64 indicates a downside potential of 11.8%.
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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.
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