What happened
The auto market has had a wild week as investors poured into, and then out of, EV stocks and high-risk names.
The three notable moves were Quantumscape (QS 0.31%), Carvana (CVNA +0.94%), and Fisker (FSR +0.00%), which all jumped double digits at some point this week. According to data provided by S&P Global Market Intelligence, Quantumscape was up as much as 18% this week, Carvana popped 40.2%, and Fisker rose 12.5%.
But the highs didn't stick for these stocks. At 2:00 p.m. ET on Friday, shares of the companies were up 11.2%, 26.6%, and 1.3% respectively for the week on Friday afternoon.
NYSE: CVNA
Key Data Points
So what
The market went a little wild with the reaction to some economic data this week and when that happens it's often the high-risk (or high beta) stocks that move the most. That happened with Carvana after auto sales data from June was released. According to Cox Automotive, used car prices were down 3.8% month over month and 10.1% year over year.
But sales of new light vehicles were up 19.9% from a year ago to an annualized pace of 15.7 million. So prices are normalizing on the used car side from elevated levels during the pandemic, but there's also lots of demand for new vehicles and volume continues to move through the system.
On the EV side, strong demand for new vehicles is good news and the volume numbers from most EV companies have been up significantly from a year ago, led by Tesla.
Adding to those deliveries is Fisker, which started delivering its Ocean SUVs to customers in the U.S. in June. The company may finally be starting to generate revenue on the vehicle that was years in the making -- and this was enough to excite investors for a while.
Now what
Part of the reason these stocks moved so much Friday was a short squeeze in some stocks like Carvana. You can see below that the short interest in the stock rose rapidly as the stock dropped, but eventually, those short positions need to be closed and that can create buying pressure when a stock starts moving higher.
This week's move doesn't answer the fundamental question about how profitable each of these companies can be long term. You can see below that free cash flow is negative for each and it's not clear when any of them will turn cash flow positive.
CVNA Free Cash Flow data by YCharts
Short squeezes can be great for a stock price short-term, but it's revenue and profits that drive a stock price long-term. And on that front, all three of these companies have a big hill to climb. I'm bullish on the adoption of more EVs, but it doesn't mean every company will survive -- and that's why I'm not buying these stocks this week.
