What happened
Shares of electric vehicle upstarts Rivian (NASDAQ: RIVN), Lucid Group (NASDAQ: LCID), and QuantumScape (NYSE: QS) were down big on Wednesday, falling 5.2%, 8%, and 8.5%, respectively.
These three are very big names in the electric vehicle industry, but while the long-term future of EVs remains bright, these companies are also burning through lots of cash at the moment. That’s not what investors are looking for as the Federal Reserve raises rates and the economy potentially enters a downturn next year.
Hawkish commentary from two different Fed officials today caused stocks to fall, especially unprofitable and cyclical stocks. Unfortunately, electric vehicle stocks are both. The uncertain outlook on interest rates and a potential recession was enough to even send Lucid down, even as it unveiled some exciting new models.
So what
Today, Lucid unveiled several new cars, including the Lucid Air Pure and Lucid Air Touring sports sedan models, as well as the new Lucid Gravity SUV, which is now ready for delivery. The Lucid Air Sapphire, the high-powered roadster model of the Air line, is also in its “final stages of tuning” on the racetrack.
Still, investors these days aren’t as impressed with automobile specs and flashy press releases as much as with company balance sheets. This is because not only are unprofitable companies’ valuations hurt by rising interest rates, but the prospect of a potential recession could also weigh on consumer purchasing power, even high-end electric vehicles like Lucid and Rivian.
This morning, both Kansas City Fed President Esther George and San Francisco Fed President Mary Daly gave very hawkish comments to the media, saying the Federal Reserve would continue hiking interest rates, and that it was not considering pausing at this time. This is in spite of a softer-than-expected inflation report last week and then another one yesterday.
This morning’s comments in the wake of soft inflation data, as well as retailer Target’s soft fourth-quarter outlook, may be causing investors to fear the Fed will go too far and hike interest rates until we have a recession.
High interest rates combined with a recessionary environment is really not good for these EV stocks that are still burning through cash. In fact, Lucid itself announced a $600 million at-the-market equity sale program last week, along with an additional $915 million investment from an affiliate of large shareholder the Saudi Arabia Public Investment Fund.
Having to sell additional stock when your shares are down more than 80% from their highs is a less-than-ideal scenario. However, it’s probably necessary, as Lucid only had about $3.3 billion in cash as of last quarter — about enough to last for just a year.
Rivian is in a bit of a better place, with $13.8 billion in cash at the end of the third quarter. Still, Rivian hasn’t reached sufficient scale on its manufacturing plants to even earn a gross profit. Its cost of goods sold were about $220,000 per vehicle last quarter, versus a selling price of just around $81,000, according to CFRA.
Then there’s QuantumScape, which isn’t a carmaker and is not only unprofitable but pre-revenue. Its solid-state battery technology holds a lot of promise, but it is also burning through its $1.15 billion cash pile, with an uncertain date for commercialization. The delays and uncertainties associated with QuantumScape’s time to market led to a big analyst downgrade of its shares last week.
Now what
We may not get a recession, as the U.S. consumer and the labor market still appear to be relatively strong, despite the Fed’s aggressive interest rate hikes to date. Still, investors should prepare their portfolios for the potential of a recession next year. That likely includes pivoting away from unprofitable, cash-burning stocks like these three.
While the long-term outlook for EVs is no doubt sunny, these start-up companies will have to eventually make it to the other side of the ramp in production to become profitable. In the dot-com crash, not every promising technology company had the balance sheet to make it through that recession, and it’s a fair question whether we will see a prominent EV company go bust this time around. Even if these companies don’t go bankrupt, they may have to engage in more stock sales, which could heavily dilute shareholders.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.
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