EV Growth and Market Penetration: A Closer Look

Tesla, the electric vehicle (EV) manufacturer, has been subject to scrutiny regarding the potential saturation of its target market. Bernstein analyst Toni Sacconaghi, who holds a bearish view on Tesla's shares, delves into this issue in a recent report.

EV Adoption Patterns in Democratic, High-Income, and Urban States

Sacconaghi examines state-level data to gain insight into the EV landscape. He identifies three key characteristics shared by states with high levels of EV adoption, such as California, Hawaii, and Washington: their Democratic leanings, above-average incomes, and higher rates of urbanization.

This information comes as no surprise. However, what stands out is the fact that 85% of EV owners belong to the top third of income earners, while nearly 80% reside in urban areas.

Are Democratic Early Adopters Exhausted?

One concern raised is whether all Democratic early adopters have already embraced EVs, which could pose a challenge for Tesla. Sacconaghi dismisses this notion, asserting that significant EV growth has been observed in highly penetrated states with relatively higher-income levels, surpassing 40% during the first half of 2023. Moreover, states with comparatively lower-income levels experience even higher growth rates, exceeding 50%.

The Adoption Curve: Conservative, Less Affluent, and Rural States

Sacconaghi highlights that EV adoption is still in its early stages for conservative states with lower affluence and more rural characteristics. These regions are yet to fully embrace EV technology. His analysis suggests that the states with the highest penetration of EVs have not yet reached saturation.

In conclusion, while it is true that wealthier and urban areas currently dominate the EV market, there is still ample opportunity for growth in less affluent and rural regions across America. Tesla's prospects remain promising as it taps into the untapped potential of these markets.

Affordable Electric Vehicles: The Key Issue

The biggest concern in the electric vehicle (EV) industry is not politics, but the affordability of these vehicles. Despite their increasing popularity, EVs still come with a hefty price tag. According to Kelly Blue Book, the average price of an EV in October was approximately $52,000, even before considering any federal tax credits. This is significantly higher than the average price of all vehicles, which stood at about $48,000. In fact, EVs are often categorized as luxury cars due to their higher price range.

Furthermore, non-luxury vehicles are even more affordable compared to EVs. Kelly reports that the average price for a non-luxury vehicle is approximately $44,000, making EVs approximately $8,000 more expensive than their non-luxury counterparts.

RBC analyst Tom Narayan, a supporter of Tesla, shares this concern about affordability. He rates Tesla as a Buy and has set a price target of $301 per share, which is nearly double that of Sacconaghi. Narayan agrees with Sacconaghi's conclusion that prices of EVs need to decrease.

Narayan also highlights the importance of introducing newer models to attract car buyers. He points out that two of the top-selling EVs, the Chevy Bolt and Tesla Model 3, have been on the market since 2016 and 2017, respectively.

Both analysts anticipate significant growth in the EV market in the future. However, it should be noted that they might not see eye to eye when it comes to their opinions on Tesla stock.

When evaluating Tesla's stock, several factors come into play, including overall EV market growth, market penetration, valuation, profit margins, and competition. These elements contribute to determining Tesla's price targets on Wall Street.

On Monday, Tesla's stock closed at $235.60, experiencing a 0.6% increase. In comparison, the S&P 500 and Nasdaq Composite rose by 0.7% and 1.1%, respectively.

In conclusion, affordability remains a significant challenge for the EV industry. Lowering prices and introducing new models are crucial steps to drive further growth and adoption of EVs. Balancing these factors, along with other market dynamics, will shape the future of electric vehicles.