Tesla skids 4.79% as ON Semiconductor hits the brakes

Key Points

• ON Semiconductor reported Q3 results exceeding earnings and revenue expectations, but the company's Q4 sales forecast fell short of Wall Street's projections.
• The company's warning signs suggest a slowdown in EV sales, visible through Tesla's price cuts and Ford's EV strategy revamp.
• Analysts downgraded ON Semiconductor's stock post-earnings, though its P/E ratio is lower than other semiconductor stocks.

Despite a gain of 1.13% in the Invesco QQQ NASDAQ: QQQ, which tracks the Nasdaq 100 index, Tesla Inc. NASDAQ: TSLA skidded 4.79% after disappointing guidance from chip supplier ON Semiconductor Corp. NASDAQ: ON. 

ON Semi reported third-quarter results, topping both earnings and revenue views, as you can see using MarketBeat’s ON Semiconductor earnings data. Revenue came in at $2.18 billion, down 1% from the year-earlier quarter. Earnings of $1.39 a share were down 4%. 

However, the company’s fourth-quarter sales forecast was the problem. ON Semi estimates revenue of about $2 billion in the current quarter, short of Wall Street’s expectation. 

ON stock ended the October 30 session with a decline of 21.77 after gapping down at the open, and continuing to fall. The stock closed at the low end of its trading range, in enormous trading volume. You can see that drop on the ON Semiconductor chart. 

Tesla is taking a hit after the ON results because the forecast suggests EV sales are hitting the brakes. In actuality, the clues were already there, as Tesla has been slashing prices, and Ford revamped its EV strategy. The warning signs were actually visible over the summer, as unsold EV inventory was growing on dealer lots. 

Leading or lagging indicator?

Instead of ON’s disappointing forecast being the canary in the coal mine, it might just be the latest indication that EV demand is weaker than automakers and politicians had hoped for. 

ON Semiconductor specializes in manufacturing advanced semiconductor chips for EVs, playing a crucial role in the automotive industry's shift towards electrification. 

These chips are designed to meet the unique demands of EVs; for example, they’re designed to ensure efficient power management, high-performance processing and enhanced safety features. All those features and crucial to EV operations. 

A September analysts’ day presentation outlines the various places throughout an EV’s architecture that involves high-performance technologies. 

In that presentation, the company clearly showed that it’s throwing its lot behind EVs, noting that key components of a “winning formula” include: 

• Focus on high-growth megatrends in automotive and industrial and win with onsemi intelligent power and sensing.
• Double down and don’t dabble.
• Invest in disruptive innovation to drive higher-margin growth.

Of course, going all-in also means taking the hits, which is exactly what’s happening. 

Analysts say hold the stock

Since ON Semiconductor’s earnings report, two analysts downgraded the stock. ON Semiconductor’s analyst ratings show a consensus view of “hold” but it wouldn’t be surprising to see more downgrades. 

On the other hand, with a price-to-earnings ratio of 16, ON Semi stock is a lot less frothy than other semiconductor stocks, such as Nvidia Corp.’s NASDAQ: NVDA P/E of 77. Keep in mind, however, that all chip companies are not created equal, and that Nvidia still sports a high P/E as investors are retaining more optimism about the power of AI, while sunny opinions of EVs are running off the road fast.

For example, Ford wasn’t the only automaker putting the damper on expectations for EV sales. 

In her third-quarter shareholder letter, General Motors Co. NYSE: GM CEO Mary Barra said, “We are also moderating the acceleration of EV production in North America to protect our pricing, adjust to slower near-term growth in demand, and implement engineering efficiency and other improvements that will make our vehicles less expensive to produce, and more profitable.”

EVs at prices people can afford

At the time of Tesla’s third-quarter report on October 18, CEO Elon Musk said the company’s slower growth isn’t due to demand issues, but the company has to make cars “at a price that people can afford.” In fact, demand for higher-priced EVs does seem to be slowing, affecting all automakers, even Tesla, which Musk once characterized as recession-resilient. 

Tesla had already caused problems for ON Semiconductor. 

Shares declined in May after Tesla, an ON Semi customer said it had identified a way to save money on chips used in its vehicles by reducing the size of the silicon carbide products that ON Semi specializes in.