What happened
Electric vehicle stocks had a rough week as investors started to rethink the recent bullishness about the industry.
According to data provided by S&P Global Market Intelligence, shares of Canoo (GOEV +900.00%) have dropped 21.7% from the close of trading last Friday to 11:30 a.m. ET today, Fisker (FSR +0.00%) is down 11.6% in that time, and Lucid (LCID +4.15%) is off 15%.
Image source: Getty Images.
So what
After giving EV stocks a strong run early in the month, investors are finally focusing on fundamentals as earnings season nears, and that means we have to think about supply and demand. Supply is increasing in electric vehicles, but Tesla's (TSLA +4.52%) continued price cuts throughout the second quarter have led to concerns that demand isn't going to be high enough to consume all of the supply.
Legacy automakers are also strengthening their positions in the market by agreeing to include Tesla's charger in their vehicles. It's no coincidence that Ford, GM, and Rivian have announced agreements to license Tesla's plug, while Canoo, Fisker, Lucid, and Nikola haven't. This might be a case in which any advantage these companies have gained by being EV-only manufacturers is slowly being chipped away even before they reach scale.
At the same time, Chinese EV manufacturers have been growing quickly and are now threatening their U.S. and European rivals. Ford Executive Chairman Bill Ford said this week that U.S. manufacturers are simply not ready to compete with Chinese EV manufacturers yet. And foreign-made vehicles are being exported to the U.S. at compelling prices.
If supply is increasing faster than demand, that could lead to further margin pressure and, for companies like Canoo, Fisker, and Lucid, even bigger losses than investors expected.
Now what
The financial reality of building a large manufacturing business is hitting a lot of these companies hard. Not only do they need to scale quickly, but they also need to find demand for vehicles as they come off the assembly line. Pricing trends at Tesla and other manufacturers, combined with falling backlogs, show that demand might not be what a lot of investors had hoped.
I think the biggest concern for each of these three companies is that the clock is ticking on their current finances. You can see in the chart below that cash burn is currently higher than cash on the balance sheet, which means they need more funding to survive.
LCID Cash and Equivalents (Quarterly) data by YCharts.
It doesn't look as if all EV manufacturers will survive as stand-alone companies, and that position might come to a head with second-quarter results on the horizon. EV supply has been the focus for a decade, but now, we don't know if there's enough demand. That's not a great question for any manufacturing company to face.
