What happened
High-growth companies in the auto space had a great run during the pandemic, but that's quickly crashing back to reality as interest rates rise and auto sales slow in 2023. Today was no different as electric vehicle (EV) stocks cratered and so did auto retailers.
Three of the biggest movers were Canoo (GOEV -5.00%), Hyzon Motors (HYZN -2.11%), and Carvana (CVNA 0.29%), which dropped as much as 8.3%, 9.9%, and 13.7% respectively.
So what
The auto market went through a major speculative bubble from 2020 to 2022 and now it's time for companies to show they can build a sustainable business. The rubber is hitting the road, if you will.
While there's been some rally in stocks recently on the back of falling interest rates and hope that the Federal Reserve will soon be forced to lower rates, the speculative phase is ending. Earnings season has begun and investors are going to get a feel for how good, or bad, the results are for these companies.
Recent news hasn't indicated good news for these companies. Tesla lowered its prices around the world and used Tesla values quickly dropped. That's likely an indication that Tesla doesn't have enough demand to fill the supply, which may mean Canoo and Hyzon will have a hard time drumming up demand.
Carvana has been losing money selling used cars, which should have been profitable from day one. No growth can mask negative margins and with used vehicle values falling the company may soon run out of cash.
CVNA Operating Income (TTM) data by YCharts
You can see above that all three companies are losing money from their operations and that's not sustainable as these companies lose market value and run out of places to raise funds.
Now what
Used vehicle prices are falling, automakers have more supply of new vehicles, which is putting pressure on prices, and at the same time these companies don't have existing cash flows to fall back on.
I think challenges are going to get even harder for each of these companies because of their operations and the market's decline. When companies need funds to keep a business running they can go to the debt market or the stock market. But in the case of all three companies, those options may be closing.
These companies have market capitalizations of between $400 million and $700 million, which means even raising enough money to fund operations for a few quarters would be demanding right now.
I don't think now is the time to bet on any of these speculative companies that are losing money. The auto business is only going to get more competitive over the next year and some companies may not survive. It's better to miss the first part of a rally but not take the risk of losing all of your capital than buy a company that's in real trouble, which is where these companies are now.
