Analysts worry sales of the Model Y—the smaller version of the company’s Model X sport-utility vehicle—could steal sales from the Model 3, the company’s hottest-sellingcar. It’s a near-term concern, but the crossover segment of the U.S. car market is huge, likely leaving enough demand for Tesla (ticker: TSLA) to grow.
The company began producing the Model Y at its Fremont, Calif., manufacturing facility in January. Deliveries are set to start later this year.
“On the surface, demand for Model Y appears promising,” wrote Bernstein analyst Toni Sacconaghi in a Tuesday research report, adding, “there is a striking physical similarity between the Model 3 and Model Y and with the Model Y being more a Coupe than an SUV.”
He worries there isn’t a big enough difference between the Model 3 and the Model Y. German luxury auto makers BMW (BMW.Germany), Mercedes-Benzand Audi saw sales of similar-sized sedans fall when they introduced the respective X3, Q3 and GLC crossover vehicles, Sacconaghi pointed out.
It’s a valid concern and one echoed by one of Tesla’s biggest bulls: New Street Research analyst Pierre Ferragu.
“Currently, 20% of Model 3 trade-ins in the U.S. are SUVs,” wrote Ferragu in a recent research report. “We expect the launch of Model Y to cannibalize Model 3 sales by that order of magnitude.”
He sees that only as a near-term worry, though. Ferragu added that SUVs are three times as popular as sedans in America. And he said the total addressable market for Model 3 and Model Y-sized vehicles is 50% larger than that for Tesla’s larger, more expensive, Model X and S vehicles.
Ferragu says the Model 3 and Y increase Tesla’s global addressable market from about 8 million vehicles to 20 million. Tesla sold about 370,000 cars in 2020.
It’s a big jump, but his estimate of the market’s size may be conservative. “Cars accounted for 56.2% of personal use sales in 2005 but dropped to 34.1% in 2019 and SUV share has dropped from 18.7% down to 10.9%,” wrote Benchmark analyst Mike Ward in a February research report reviewing the U.S. car market. “CUVs, which satisfy the needs of a car but look like an SUV, have been the winners.”
CUV is short for crossover-utility vehicle.
Ward points out 6.9 million crossovers were sold in the U.S. in 2019, about 41% of all light-vehicle sales. CUV sales are up about 200% over the past decade. American’s love crossovers.
So cannibalization might be a problem, but it’s a so-called “high-class” problem for Tesla, a company increasing its sales and vehicle offerings rapidly. Still, investors should pay attention because Tesla stock is very volatile. Shares are up about 120% over the past three month, crushing comparable gains of the S&P 500 and Dow Jones Industrial Average over the same span.
The incredible stock run led even Ferragu, a longtime bull, to downgradeTesla shares to the equivalent of Hold. His target for the stock price, at $800, is still the highest on the Street. Sacconaghi also rates shares the equivalent of Hold, but his price target is just $325 a share. Ward doesn’t cover Tesla stock.