2022 was a dismal year for much of the market, and electrical vehicle (EV) stocks didn't escape the pain. Valuations compressed across the sector as interest rates rose and fears of a recession increased. Manufacturers also faced several sector-specific headwinds, including rising lithium prices, supply constraints, and competition from legacy automakers.
As you can see from the chart below, EV stocks got crushed across the board last year.
Though investors hope the sector will experience a comeback in 2023, that seems unlikely to materialize this year. Here are several reasons why.
Image source: Lucid.
The Tesla halo effect is gone
Tesla's (TSLA 2.05%) success didn't just result in soaring valuations for its own stock. With a valuation that topped $1 trillion at one point, it cast a broad halo over the entire EV sector as investors seemed to believe Tesla's own achievements and the stock's gigantic returns would be repeated by entrants like Rivian (RIVN 4.03%) and Lucid (LCID 5.25%). That led to crazy valuations like Rivian's market cap topping $150 billion even before it had a product on the market.
While those companies face their own challenges in trying to live up to those high expectations, it also seems that the halo effect that benefited the entire industry is gone. Tesla's reputation and Elon Musk's own status as a visionary have suffered from his tenure running Twitter, and Tesla's stock and the brand have taken a hit.
Over the last three months, Tesla stock has fallen 56%, even as the company's results have been mostly in line with expectations, but the brand has been suffering while Musk has been busy with Twitter. Surveys have shown some brand deterioration among potential Tesla buyers in part due to Musk's outspoken political antics. One YouGov survey showed Tesla's net favorability ratings went negative for the first time ever in November. And there are signs the product may be suffering, too.
In Consumer Reports' recent reliability rankings, Tesla ranked just 19 out of 24 brands surveyed, and the magazine rated it just 40 out of 100 in reliability, giving an even lower rating of 36 to the EV sector in general.
Tesla once seemed to be widely admired as a visionary company. Still, the notion that Tesla will disrupt the market in areas like artificial intelligence (AI), autonomous driving, and solar seems increasingly unlikely. And the rest of the EV sector is losing out as the market falls out of love with Tesla.
Valuations still look stretched
It may seem like EV stocks are cheap after last year's plunge, but aside from Tesla, none are profitable, and nearly all are posting wide losses. Much of their valuations still come from their potential rather than the current business performance.
Lucid, for example, is ramping up production and is on target to produce 6,000 to 7,000 vehicles in 2022, but it's also losing enormous sums of money. In the third quarter, the company had a generally accepted accounting principles (GAAP) net loss of $670 million and a free cash flow loss of $860 million.
The company tapped equity markets in December to raise $1.5 billion, but that diluted shareholders. And if cash burn doesn't normalize soon, it will have to raise more money, further diluting shareholders and weighing on the stock price in a vicious cycle. The company is targeting EBITDA (earnings before interest, taxes, depreciation, and amortization) profitability by 2024, but a lot has to go right for it to get there.
The stock has fallen significantly since it went public through a special purpose acquisition company (SPAC) in 2021. But at a market cap of $11 billion, it still seems expensive for what's essentially a development-stage business. Without Tesla's preceding halo effect, the stock wouldn't have been so high-priced to begin with.
Rivian, by comparison, is further along in its production ramp, producing close to 25,000 vehicles in 2022. However, the company is losing even more money, with a net loss of $1.72 billion in its third quarter and a free-cash-flow loss for the first nine months of 2022 at $4.7 billion.
Macro headwinds are worsening
Cars are among the most cyclical products in the economy, and in recessionary environments, consumers tend to delay expensive purchases like new vehicles. EV companies like Tesla, Rivian, and Lucid mostly sell in the high-end vehicle market, making them even more vulnerable to a downturn. Higher interest rates are also making financing more expensive for car buyers and will make it pricier for manufacturers to tap the debt markets.
The EV sector has never faced a true recession, and a significant downturn will likely deal a substantial blow to the industry. Lithium prices also rose over most of last year and could weigh on gross margins or make vehicles more expensive for consumers.
The electric vehicle industry holds a lot of promise, but it faces significant challenges, and many popular EV stocks are unproven and far from profitability. Investors are best off taking a cautious approach to the industry until the economy improves and cash burn becomes more manageable for companies like Rivian and Lucid. 2023 is likely to be another rough year for the EV sector.
