Rising interest rates have huge implications for capital-intensive companies like electric vehicle startups.
The sell-off in EV stock went from bad to brutal on Monday. Rivian RIVN 0.04%
Cars, poster boy of deflated balloons, down 21% after news of Ford Motor F -0.15%
sold part of its shares. It is now 71% off its initial public offering price.
It hasn’t been an easy period for EV startups due to widespread material shortages and inflation. But the latest stock moves aren’t primarily about fundamentals like the car sales outlook. In its 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 vehicles for 2022, which fell from 20,000 in February.
Instead, the path seems to involve growth rate math for companies valued on the basis of expected returns for years to come. It happens with Tesla TSLA 1.64%
also those whose fundamentals are strong in auto manufacturing but are largely valued for other profit streams it can generate in a relatively distant future from services like Driverless taxis and robots. Shares fell 9% Monday.
While soaring capital costs also hit speculative stocks in other sectors, EV startups have more to lose than most. Launching a new automaker is extremely expensive, and the costs come before profits by years. Closing this gap is much easier if the money is essentially free, as was the case with cash flow from special purpose acquisitions last year. Those days are going by fast.
Companies fill up with cheap capital while they can. Rivian, which reported first-quarter results on Wednesday, was best placed with $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 burned through about $680 million in the first quarter. Last week, the company said its cash would fund the company “through 2023,” making it imperative that it needs to raise more money next year. There are a host of smaller startups in positions that become more precarious with each market sell-off.
One question we might stop hearing is whether traditional automakers should take on their own electric vehicle ventures – a recurring theme of first-quarter results calls. in recent weeks. Separate listings seem like a good idea, at least in bankers’ spreadsheets, as EV startups hit insane valuations. Rivian and Lucid still trade at much higher values per vehicle than their peers, but neither wants to test investors’ appetites in today’s market.
Ford said in March that it would separate electric vehicles like the Mustang Mach-E and F-150 Lightning in its segmentation report. While that should provide some useful insight into the financial impact of its powertrain change, investors should perhaps refrain from any expectation that there is a change. Hot changes in the cards. Ford stock fell nearly 6% on Monday — more than its peers — although that could be partly explained by the drop in the value of its remaining Rivian stake.
This year’s cost inflation has raised expectations about when electric vehicles could be affordable for consumers and profitable for manufacturers, who have been betting heavily on the technology. Now rising rates are giving a new urgency to questions of affordability and profitability. Automakers have a lot of work to do.
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Appeared on 11 May 2022, print edition as ‘EV Stock Faces Long Road to Redemption.’
https://www.wsj.com/articles/ev-stocks-face-a-long-road-to-redemption-11652185526?mod=rss_markets_main EV Stocks Face a Long Road to Redemption