Electric vehicles (EVs) were all the rage in 2021 and 2022, with companies like Rivian (RIVN 0.20%), Lucid (LCID 3.44%), Nio (NIO -5.26%), and many others hitting the market, and Tesla (TSLA -1.74%) suddenly becoming one of the most valuable companies in the world.
But 2022 brought a dose of reality to the market. Values for growth stocks fell, and EV stocks came down with them. In 2023, the challenge will be turning potential into profit. This might be easier said than done in the EV industry.
Legacy automakers aren't giving up without a fight
The EV market has been dominated by Tesla for over a decade with very little competition. Automakers like General Motors (GM -0.51%) and Nissan had EVs, but they were often underpowered with little range compared to Tesla's vehicles.
That's beginning to change with the launch of new EVs from the companies mentioned above, along with Volkswagen Group (VWAGY -1.10%), GM, Ford (F -0.16%), Kia, and even BMW (BMWYY -3.39%). Tesla is losing market share (although it's still growing), and legacy automakers are happy to welcome buyers back.
Competition is only going to get more fierce as EV production picks up. The F-150 Lightning and Mustang Mach-E have been hits for Ford. VW's ID.4 and the Audi e-tron are the first products in a multiyear strategy to grow EVs for the Volkswagen Group. And there are dozens of other models hitting roads in coming years.
As competition increases, companies will be fighting over the same customers. That means high prices and margins are likely to decline in EVs. And we're already seeing signs that trouble is ahead.
Expensive vehicles are going to take a hit
One headwind facing all automakers is higher interest rates. You can see below that both the 3-year and 10-year Treasury rates are up sharply over the last year, and that makes borrowing for a car more expensive.
10-year Treasury rate, data by YCharts.
This will have two effects for the auto industry. One is that any given transaction is more expensive, even if there's a willing buyer. This may cause buyers to trade down to a less expensive vehicle or wait just a little longer to buy.
The second impact from higher rates is falling values for homes and equities leaving people with less money to buy a vehicle at all. That could cause EV sales volume to grow more slowly in 2023, or even fall.
We are already seeing effects on both volume and pricing. Tesla has cut the price of vehicles in China by nearly 20% as a price war appears to be brewing there. The same dynamic could eventually reach the U.S. and Europe.
Not everyone will survive
Not every public EV company will survive the next decade. There are simply not enough buyers for all the vehicles coming to market.
The chart below shows just how much cash three big EV names -- Rivian, Lucid, and Canoo (GOEV -1.55%) -- are burning right now. They can't sustain this forever.
RIVN free cash flow; data by YCharts.
It's not clear which company will emerge with a profitable business and which will end up in bankruptcy or being bought out by a larger company. But I would be careful buying a basket of EV stocks because some companies might not survive for long.
Show me the money
Most of the new EV manufacturers aren't profitable, but it's OK to wait until a company sustainably produces profits before buying in. Even Tesla's profit-making operations have questions after recent price cuts and an incredibly high valuation compared to legacy automakers.
I don't think now is the time to buy EV stocks. This is a manufacturing business, and such companies typically don't do well with rising interest rates and recessions. The industry won't be immune to that, so I'll steer clear unless I see a great value in an EV stock.
