What happened
Shares of electric vehicle (EV) stocks Nio (NIO 3.49%), Lucid Group (LCID 1.19%), and Lordstown Motors (RIDE -0.58%) fell on Wednesday, down 5.1%, 3.6%, and 4.9%, respectively, as of 2:17 p.m. EDT.
There wasn't much company-specific news today. In fact, with the OPEC+ nations agreeing on cuts of 2 million barrels per day today, that just made EVs more desirable, all else being equal.
But young up-and-coming EV makers are in a capital-intensive business, which might require raising more money before meaningful revenue comes in. And the cost of that capital went up today, after two days of declines.
So what
The first two days of October saw huge gains in stocks, with the biggest gains in risk-on stocks such as these three names. After a huge amount of selling in September, stocks were beaten down, but the first two days in October saw some potentially good news on inflation.
On Monday, a report from mortgage-data provider Black Knight showed housing prices falling 0.98% in August. Shelter costs are a huge amount of the Consumer Price Index (CPI), but operate with a lag. With traders trying to sniff out the first signs of inflation breaking, that was a good sign.
Then on Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) showed openings falling at a greater rate than expected, which could signal a cooling labor market. A lower-than-expected manufacturing report from the Institute for Supply Management (ISM) on Tuesday also backed up the thesis of a cooling economy.
In the wake of these reports, long-term bond yields fell, and stocks rose.
But Wednesday saw some stronger-than-expected economic data, reversing those trends. The ISM's non-manufacturing Purchasing Managers Index (PMI), or services sector PMI, came in at 56.7, still showing growth and slightly above analysts' expectations.
A second Wednesday report on economic activity, the Automatic Data Processing (ADP) survey, indicated the economy added 208,000 jobs last month, slightly higher than the 200,000 that were forecast by analysts. It also marks an acceleration above the 185,000 upwardly revised figure in August.
These slightly hotter-than-expected figures would be good news in normal times, but since the Federal Reserve is trying to cool inflation, it sent stocks down and bond yields up. The 10-year Treasury bond yield rose 15 basis points to 3.77%, after falling over the past few days.
Rising bond yields are really not good for young EV companies, since they are burning cash to ramp up production. Not only do higher long-term rates decrease the value of future cash flows, but each of these companies also may need to raise more money in the near future.
Nio is in a fairly solid position, with over $8 billion in cash against just roughly $2 billion in long-term debt, but it did burn through $425 million in operating losses last quarter alone. As a Chinese company, Nio's U.S.-listed shares are also hurt by a strong dollar, which is also rising along with interest rates.
Lucid burned through $823 million between operating cash losses and capital expenditures last quarter alone, and only has $4.3 billion in cash against $2 billion in long-term debt.
Even though Lordstown Motors has gone with an asset-light approach, recently selling its manufacturing facilities to partner Foxconn (FXCNF -7.87%), it only has $236 million in cash left on its balance sheet, and is pre-revenue with $40 million in operating expenses last quarter. The company announced the start of production of its Endurance pickup truck at the Ohio factory on Sept. 29, so revenue should begin to come in, but with that low a cash balance, it's quite possible Lordstown may need to raise cash at some point.
Image source: Lucid Group.
Now what
Rising rates aren't good for any company currently burning through cash, with future profitability somewhat uncertain. Therefore, these three companies will likely be beholden to macroeconomic forces until inflation (and therefore interest rates) come down.
However, that could be a double-edged sword, as it could take a recession to bring down prices that much, which could potentially hurt demand.
As is always the case in times of uncertainty, high-multiple growth stocks that are unprofitable are a risky bet. The EV sector is poised to take off this decade, so these stocks might work out in the end, but remember, auto manufacturing is a capital-intensive and relatively low-margin business. Not every company will be a winner, and some could even go bust. Those betting big on the EV revolution may therefore want to think about their overall exposure to this volatile sector.
