What happened
Electric vehicle stocks came to life on Monday morning as the market rose and investors poured back into growth and higher-risk stocks. It didn't hurt that an analyst made positive comments about Tesla (TSLA 1.50%), giving bullish investors even the slightest reason to buy a stock that's been crushed in the last few months.
Shares of QuantumScape (QS -3.61%) are leading the way jumping as much as 14.4%, while Nio (NIO 0.38%) was up 7.2%, and Canoo (GOEV -3.14%) rose 3.7%. Shares of the stocks were up 11.9%, 5.6%, and 0.9% respectively at 2:20 p.m. ET.
So what
A lot of the bullishness in the EV market has come from Citi analysts, saying they were optimistic about Tesla's fourth-quarter results. Shares have fallen sharply over the last two months as discounts failed to spur higher sales, which is causing investors to question how strong Tesla's revenue and margins will be. But today, the positive spin has taken hold.
The broad story today is the market's general realization that the Federal Reserve is nearly done raising interest rates. Economic data has showed that inflation is easing, but the labor market remains strong, despite higher interest rates. The best-case scenario is a "soft landing" for the economy and not the recession most economists expected.
To bolster that view, the 10-year government bond rate fell four basis points in the U.S. to 3.52%. This is 176 basis points higher than a year ago, but it appears rates are no longer rising, which is good for stock investors.
The biggest risk for EV companies in 2023 was the global economy going into a recession, as well as the combination of weaker consumers and higher interest rates leading to a drop in demand. That may still happen, but today the market is anticipating that the impact won't be as bad as feared. We'll have to see what Tesla's actual results for the fourth quarter were before confirming that's the case.
Now what
While the EV market broadly may not have a bad year in 2023, that doesn't mean Canoo, Nio, and QuantumScape are great buys today. All three are burning money and have yet to prove they can reach profitability with any level of scale.
NIO Free Cash Flow data by YCharts
Even a company like QuantumScape that's gaining momentum today is only shipping prototypes to automakers. That's far from proving that operations will scale efficiently over time.
I wouldn't be buying these stocks right now, given the risk ahead. It's better to lose out on the early start of a rally if they get to profitability than to buy into a company that'll never reach profitability. And I'm concerned that all three of these companies may never get there.
