What happened
Electric vehicle stocks were getting hit hard today after the monthly jobs report came in stronger than expected for September. According to the Bureau of Labor Statistics (BLS), the economy added 263,000 jobs in the last month, slightly more than the 255,000 economists expected. The unemployment rate also fell from 3.7% to 3.5%, against expectations of 3.7%, showing the labor market remains extraordinarily tight across much of the country.
While a strong labor market might sound like good news, it's likely to fuel inflation, which means the Federal Reserve will have to continue raising interest rates. That logic led Treasury yields to rise today, with the 10-year Treasury note up 1.8% to 3.89%. This helped push stocks lower.
Higher interest rates tend to be bad for stocks because they make borrowing money more expensive and makes bonds more attractive in comparison to stocks. They also make future earnings less valuable because they raise the discount rate in financial models.
Image source: Rivian.
Higher interest rates are an even greater headwind for unprofitable growth stocks like Rivian Automotive (RIVN +2.01%), Chargepoint Holdings (CHPT +0.48%), and Lordstown Motors (RIDE +0.00%), as borrowing rates will go up and future earnings are less valuable. Rising interest rates also increase the likelihood that the economy will fall into a recession, which will be a headwind for EV demand, as automotive sales are cyclical.
As a result, EV stocks were down broadly this morning. As of 10:47 a.m. ET, Rivian stock was down 9.5%, Chargepoint had lost 4.9%, and Lordstown was 7.5% lower. At the same time, the S&P 500 was down 2%.
So what
All three of these stocks are still in early growth stages and are highly unprofitable. Therefore, they are especially sensitive to the macroeconomic environment, including rising interest rates and the risk of a recession.
NASDAQ: RIVN
Key Data Points
Rivian announced some good news recently as investors reacted positively to its recent production update. The EV maker produced 7,363 vehicles in the third quarter and delivered 6,584 vehicles. The company also reaffirmed its guidance to produce 25,000 vehicles this year.
The update shows Rivian quickly ramping up production, which may be the biggest challenge in front of the company. It has strong demand for its electric pick-up trucks, with 98,000 preorders in place as of the end of the second quarter, as well as a deal in place with Amazon to supply 100,000 electric vans.
Still, Rivian posted a $1.7 billion operating loss on $364 million in revenue in its most recent quarter, and the company is likely to be highly unprofitable for the foreseeable future, making it a risky stock to own, especially in a high-interest, recessionary environment.
NYSE: CHPT
Key Data Points
Chargepoint Holdings went public in late 2020 through a SPAC merger, and is one of the largest electric vehicle charging companies in the world, with 30,000 charging stations in the U.S. alone. Like Rivian, it's growing quickly but also generating wide losses. In its second quarter, revenue jumped 93% to $108.3 million, but its operating loss was $90.4 million.
However, its margins are improving, as its operating loss increased just 22% from the prior year. Considering electric vehicles are still a nascent industry and Chargepoint is operating at a wide loss, it remains a risky stock and will continue to be sensitive to the macroeconomic environment.
OTC: RIDE
Key Data Points
Finally, Lordstown Motors, another manufacturer of electric pick-up trucks, has been mostly a disappointment since it went public through a SPAC in late 2020. The stock is down by more than 95% from its peak shortly after the SPAC and had yet to produce any vehicles as of its second-quarter earnings report.
The company said in late September that it began commercial production of its Endurance pick-up truck and that it expected to make 500 sellable vehicles in the first batch. Lordstown has been beaten to market by Rivian, and the EV pick-up truck market is going to get more competitive, with Ford's F-150 Lightning now on the market and ramping up production, and Tesla's Cybertruck expected to come out next year. The economic headwinds will only add more challenges for Lordstown as it seeks to establish itself in an increasingly crowded EV field.
Now what
By most conventional metrics, the EV sector still looks overvalued, especially compared to traditional autos, which often trade at single-digit price-to-earnings ratios. Tesla's success seems to have distorted investors' expectations for the sector, though there could be more winners over time. Still, investors should be mindful of rising rates and the macroeconomic environment, as they'll eventually cool off EV demand if they keep rising.
