What happened
There wasn't much good news for the auto industry today. Not only is the market down, which tends to push down volatile stocks like Rivian (RIVN 6.10%) and Quantumscape (QS 5.69%), but interest rates are climbing again.
Shares of Rivian dropped as much as 6.3%, Quantumscape fell up to 6%, and Toyota Motor (TM 0.60%) even fell as much as 3.2% today. The three stocks were down 6.3%, 6%, and 2.7%, respectively, at 2:10 p.m. ET.
Image source: Rivian.
So what
Interest rates continue to be the hottest topic on Wall Street today. In the U.S., 10-year government bonds have increased 12 basis points to 4.8% and are up 61 basis points in the last month. Higher interest rates make it more expensive to buy a vehicle and may ultimately hurt demand, especially for companies like Rivian that are still losing money.
For perspective, a $40,000 vehicle loan with a 3% interest rate and a 5-year term would have a $718.75 monthly payment. The same loan with an 8% rate would be $811.06 per month, or 12.8% higher.
This is especially troubling for high-cost automakers like Rivian, whose vehicles often sell for over $80,000.
Toyota will also see pressure, but maybe not as much as companies that make more expensive vehicles. But with slimmer margins, automakers dance a tightrope between supply and demand, and if higher borrowing rates hit demand it could be devastating to sales.
Battery maker Quantumscape is in a different position because it's trying to ramp up sales to electric vehicle manufacturers, who may now be seeing a demand crunch. That'll make it harder to scale, so it's understandable that its shares are selling off.
Now what
Today's stock moves are all about uncertainty and projecting the impact higher interest rates will have on consumers. It's very possible that the economy will keep humming along and demand for vehicles will continue to grow, especially on the EV side. But with student loan payments resuming and homes and rent getting more expensive, it's very possible the booming market for autos -- and EVs specifically -- has passed.
What we know so far is that Rivian continues to ramp up production with 16,304 vehicles produced in the third quarter of 2023. And management expects to hit the 52,000 vehicle guidance for the full year. That's positive, but still small numbers compared to automakers like Toyota.
What I think we're going to see is pressure on all of the EV manufacturers, who are now competing with internal combustion engine vehicles more on price than features. Prices over $80,000 aren't sustainable at scale, but Rivian can't yet make vehicles profitably even at the current price.
Quantumscape is in an even tougher position, burning through $384 million in cash over the past year. That's not sustainable, especially without any revenue.
Toyota is the one stock that stands out in this list, but even it will feel pressure from higher rates. The right answer today may just be to stick to the sidelines and see what management says about third-quarter results and future guidance in a few weeks.
