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The electric vehicle (EV) industry - which until recently looked like a promising investing theme as investors poured billions into startup companies, hoping to find the next multi-bagger - is now looking like a busted story. Many EV stocks, such as Arrival (ARVL), Vinfast (VFS), and Lucid Motors (LCID) are trading near all-time lows, while last week was the worst for Tesla (TSLA) stock so far in 2023.
To be sure, EV adoption is still growing, and the industry is expanding faster than the overall automotive market. However, it’s a different story when it comes to EV stocks, and investors have grown increasingly wary of these names – including Tesla, whose mercurial CEO Elon Musk believes it could one day become the most valuable company on the planet.
Here’s what’s wrong with EV stocks right now, and what lies ahead for some of the beaten-down names in the industry.
Why Are EV Stocks Falling?
EV stocks are falling for the following four reasons:
1. Rising Bond Yields and Deteriorating Macro Environment
Bond yields have surged, and the yields on the 10-year Treasury note just hit 5% for the first time since 2007. Notably, higher interest rates are invariably negative for the automotive industry, as they make cars less affordable – something that Musk said on more than one occasion during the Q3 earnings call. The deteriorating macro environment is not helping matters for growth stocks either, including EV names.
2. U.S.-China Tensions Pressure Chinese EV Stocks
Chinese EV stocks like NIO (NIO) and Xpeng Motors (XPEV) have also struggled amid growing U.S.-China tensions and a sagging Chinese economy. Notably, both of these companies have attracted interest from global investors; earlier this year, CYVN Holdings - a firm backed by the Abu Dhabi government - and Volkswagen (VWAGY) invested in NIO and Xpeng Motors, respectively, which led to brief rallies in their stock prices.
On a related note, China has placed restrictions on graphite exports - ostensibly over “national security" issues. The move could lead to higher graphite prices and, by extension, higher production costs for EV producers. These U.S.-China tensions are a negative for EV stocks, as the country is not only the biggest market for electric cars, but also a key supplier of several battery materials - and particularly rare earth minerals.
3. Blame Tesla and the Price War
It’s been over a year since Tesla started the EV price war, and while frequent price cuts might have helped the company boost its delivery numbers, they have not only led to a free-fall in Tesla's own operating margins – which dropped to 7.6% in Q3 – but they've also prompted legacy automakers to delay their EV plans.
4. EV Demand Growth Is Not That Strong
While demand for EVs continues to rise, it's not keeping pace with the kind of supply that major players have planned. Here’s a rundown of what the actions of some automakers tell us about the EV demand environment:
- Tesla missed Q3 delivery estimates, and has said that it will go slow on building its plant in Mexico. Musk practically withdrew the targeted long-term production CAGR of 50%, which he has stressed multiple times in the past, and said during the Q3 earnings call: “It's not possible to have a compound growth rate of 50% forever or you will exceed the mass of the known universe.”
- During their Q2 2023 earnings call, Ford (F) also delayed its 2023 EV production guidance of 600,000 by a year, while adding that it would be flexible about the 2026 guidance of 2 million vehicles.
- Rival General Motors (GM) also followed suit during its Q3 earnings call, and abandoned its goal of producing 400,000 EVs by the middle of 2024. Today, the company scrapped plans to jointly develop smaller electric cars with Japan's Honda Motors (HMC). Earlier this month, it also said that it would delay the production of electric trucks at the Orion Assembly plant. Incidentally, it was GM that started the EV wave in early 2021, when it became the first Detroit automaker to commit to a zero-emission future – promising to stop building internal combustion engine cars after 2035.
- EV startup Lucid Motors, which reported dismal Q3 deliveries, has come up with a referral scheme to lure buyers – yet another sign that it is still struggling with finding buyers for its cars.
In a further testimony to the demand-supply imbalance, multiple reports suggest that dealers are stuck with rising EV inventories. This is in contrast to couple of years back, when EV companies held very little inventories and were constrained by supply – unlike now, when the industry seems almost entirely constrained by demand.
What’s the Outlook for EV Stocks?
The near-term outlook for EV stocks is looking hazy amid worsening macros, rising competition, and the continuing price war. However, the industry still holds promise in the long term, as the transition to zero-emission cars looks inevitable - especially with recurring tensions in the Middle East leading to a rise in oil prices, making countries wary of over-dependence on energy imports.
While financially strong EV companies - especially those that have a compelling product proposition and are backed by investors with deep pockets - might still survive the current slump, it looks like the end game for weaker and struggling EV names. Investors should brace for more bankruptcies, like we saw in the case of Lordstown Motors (RIDEQ).
That said, the playbook is no different from the last century, when most automotive companies went bust and only a few survived. The only difference back then was that companies were trying to produce gasoline cars - while they are trying their hand with EVs this time around.
On the date of publication, Mohit Oberoi had a position in: NIO , XPEV , F , GM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
