What happened
Electric vehicle stocks are following Tesla (TSLA 3.33%) lower today, and it's understandable why. Tesla's margins are crashing, and the company doesn't seem ready to give up on its price war.
Shares of Lucid Group (LCID 2.28%) fell as much as 5.8% today; Canoo (GOEV +950.00%) was down 9.7%; and Fisker (FSR +0.00%) was down 6.5%. The stocks closed the day down 4.6%, 7.3%, and 5.7%, respectively.
So what
Demand is really a concern for EV companies today. As the largest manufacturer in the industry, Tesla is the bellwether, and yesterday's results didn't look good. Revenue per vehicle (excluding credits) has dropped 20.4% in the past year to $45,626, and margin per vehicle has dropped 44.3% in the same time frame.
Tesla has had to cut prices to drum up demand for its vehicles, and that doesn't bode well for manufacturers that haven't yet ramped up demand. Lucid and Fisker, in particular, are ramping up their demand in a growing price war in electric vehicles.
The challenge can be seen below. All three companies are reporting massive operating losses, and it's not clear if margins will be very high at all as production ramps up.
LCID Operating Income (TTM) data by YCharts.
The result is a money-losing business for the foreseeable future. And if this price war lasts for the next few years, these companies could be in real trouble.
Now what
Electric vehicle investors have been promised a business that's higher margin than the legacy auto business with better growth, but the reality may be much harder than that. Despite billions of dollars in subsidies, EV profits are falling at Tesla, and that's a terrible sign for the industry's upstarts.
Lucid has been struggling with demand for months, pulling backlog information from its earnings reports, but investors have still held the company's value up with the stock rising 12% this year.
Fisker and Canoo have gone on a bumpy ride in the markets, but both are small compared to rivals and may not be able to ramp up their production profitably. Fisker's deliveries began recently, so second-quarter results will be telling for investors.
Broadly, I think the EV space has become extremely overvalued. Auto stocks typically trade for single-digit earnings multiples, and that's what legacy companies trade for today. Unprofitable EV manufacturers are, in some cases, even more valuable than their legacy counterparts. But as we've seen with Tesla's numbers, profits are falling as the price of EVs come down.
I think investors should take a wait-and-see approach to EVs. This could be the start of a multiyear shakeout to see who is left standing. There are likely too many players in the market right now, and not everyone will survive.
