What happened

Shares of electric vehicle (EV) makers have been dropping sharply Thursday. Early-stage companies like Rivian Automotive (RIVN -3.15%), Lucid Group (LCID 0.54%), and Canoo (GOEV -2.57%) took some of the biggest hits, dropping by between about 5% and 8% at their lows of the morning.

As of 1 p.m. ET, those three stocks were lower by 6.1%, 3.4%, and 6.9%, respectively. The session's declines put each of them at or near their all-time record lows. 

So what

As fourth-quarter EV delivery data has begun trickling out this week, investors are growing more and more concerned about the pace of expected growth in the industry. That's especially true for start-ups like these. One of the main drivers for valuations in the EV sector has been the expectation for overall demand growth. After Rivian came up short on its production and delivery report this week, and with more data arriving Thursday, investors are lowering their valuation levels for stocks in the industry.

Rivian R1S SUV just off production line.

Image source: Rivian Automotive.

Now what

Rivian said this week that it missed the production estimates that management had reaffirmed as recently as two months ago. EV leader Tesla also reported a shortfall in 2022 production relative to both its own estimates and analysts' expectations. On Thursday, it was reported that Tesla's December production dropped sharply month over month at its largest manufacturing plant in Shanghai, China. 

Rivian and Lucid have struggled to ramp up production during their first full year of operations, but the market has still assigned them valuations based on their potential for growth. Even at these low share price levels, the market capitalizations of Rivian and Lucid are about $15 billion and $10 billion, respectively. That is despite a production volume of fewer than 25,000 vehicles from Rivian in 2022. Lucid hasn't yet announced its fourth-quarter update, but it expects to announce that it manufactured no more than 7,000 of its luxury vehicles in 2022. 

Investors' expectations for growth had been supported by data showing that global EV sales doubled in 2021 and were on pace for strong growth in 2022. 

But the most recent sales and production reports have left onlookers cutting their growth expectations for the industry -- at least in the short term. Investors are therefore selling the stocks, with the more speculative names experiencing the biggest drops. Canoo, for example, hasn't yet begun production and is trading solely on hope and the expectation that it will fulfill its order backlog once production gets underway. 

Now, many investors are adopting a wait-and-see approach to the EV space. That has led to sharp declines in these stocks. Even prior to Thursday's declines, shares were down between 20% and 47% for these start-ups over the last month. Investors shouldn't expect that momentum to reverse until EV sales begin growing at, or above, expected levels.