Rising interest rates are very important for companies as capital intensive as electric vehicle startups.
The selloff in electric vehicle stocks turned from bad to brutal on Monday. Rivian RIVN 0.04%
Autos, the flagship of the deflating bubble, ended down 21% following the announcement that Ford Motor F -0.15%
sold part of its stake. It is now down 71% from its IPO price.
It hasn’t been an easy time for EV startups given widespread shortages and commodity inflation. But the latest stock market moves haven’t been primarily about fundamentals like the outlook for vehicle sales. In first-quarter results last week, luxury electric vehicle maker Lucid Group LCID -2.45%
stuck with a production forecast of 12,000 to 14,000 cars for 2022, after cutting it by 20,000 in February.
Instead, the rout appears to be tied to the calculation of rising rates for companies valued on the basis of expected earnings many years later. This goes for Tesla TSLA 1.64%
also, whose automotive manufacturing fundamentals are strong but are valued largely for other streams of profits they could generate in the relatively distant future through services such as driverless taxis and robotics. The stock fell 9% on Monday.
While the rising cost of capital is also hitting speculative stocks in other sectors, electric vehicle startups have more to lose than most. Launching a new automaker is extremely expensive, and the costs come years before the profits. Bridging that gap is much easier if the money is essentially free, as was the case with the influx of cash from special purpose acquisition companies last year. Those days are fading fast.
Companies stocked up on cheap capital while they could. Rivian, which reports first-quarter results on Wednesday, is in the best position with an extraordinary $18.1 billion in cash at the end of last year after its blockbuster IPO. Lucid had $5.4 billion in cash at the end of March, having spent about $680 million in the first quarter. The company said last week that its cash would fund it “until 2023”, with the catch being that it will have to raise more money next year. There is a long tail of small startups in positions that become more precarious with each market sell-off.
One question we might stop hearing is whether traditional automakers should start their own electric vehicle companies — a recurring theme in first-quarter earnings calls in recent weeks. Separate listings seemed like a good idea, at least in bankers’ spreadsheets, when EV startups got wild valuations. Rivian and Lucid are still trading at a much higher value per car than their established peers, but no one would want to test investor appetite in today’s market.
Ford said in March it would separate electric vehicles such as the Mustang Mach-E and F-150 Lightning in its segmented reports. While that will offer some useful insight into the financial implications of its powertrain switch, investors should probably hold back any expectation that a hot spinoff is in the cards. Ford’s stock fell nearly 6% on Monday – more than its peers – although that could be explained in part by the drop in value of its remaining stake in Rivian.
Cost inflation this year has already pushed back expectations about when electric vehicles could be both affordable for consumers and profitable for manufacturers, who have bet heavily on the technology. Today, rising rates bring new urgency to these questions of affordability and profitability. Automakers have a lot of work to do.
Write to Stephen Wilmot at [email protected]
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Appeared in the May 11, 2022 print edition as “EV Stocks Face Long Road to Redemption”.