What happened
Electric vehicle (EV) stocks have been some of the hardest hit by the market's "risk off" trading today. Major indexes are flat at 1:30 p.m. ET; many highly volatile stocks are down; and oil is up a whopping 4.3% to $86.37 per barrel.
The three most notable movers on the EV side are Lucid (LCID 2.26%), falling as much as 5.1%, QuantumScape (QS 7.55%), dropping 5.3%; and Canoo (GOEV +540.00%), losing 11.9%. As I'm writing, shares of the companies are down 3.9%, 5.1%, and 9.5%, respectively.
NASDAQ: LCID
Key Data Points
So what
Increasing conflict in Israel is causing investors in the U.S. to flee to what they feel are "safe" assets, and money-losing electric vehicle companies don't fit that bill. This time, it's not higher interest rates that are hurting stocks, it's simply fear of the unknown that's causing stocks to fall.
The rise in oil prices should actually be a bullish trend for EV stocks. One of the biggest reasons not to buy an EV today is their cost premium compared to internal combustion vehicles. But if oil continues to climb, that cost advantage evaporates relatively quickly.
The problem for all three of these companies is their inability to generate free cash flow that keeps their businesses afloat if the market turns south. All three need years of operational execution and improving revenue and margins to be viable on their own.
QS Free Cash Flow data by YCharts.
As investors question growth rates, ask whether they should buy bonds or stocks, and wonder about the future of EV start-ups, it's understandable to take money off the table in the riskiest EV companies.
Now what
The reality is that walls are closing in around all three companies. Lucid's only hope for long-term survival -- outside of an incredible increase in demand and reduction in costs -- is a bailout by Saudi Arabia's Public Investment Funds, which owns a controlling stake in the company. Lucid recently opened a production facility in the country, and there's a vested interest in making Lucid viable.
Canoo's options are running out as cash runs dry. And no production ramp to bring in free cash flow appears to be imminent. Quantumscape is still pre-revenue and continues to raise cash, although markets seem a little more open to the battery company.
A flight to safety isn't going to help EV upstarts, and this is a time when they need healthy stock prices to open up fundraising options. If stocks continue to fall and investors sell risky assets, it'll make it more expensive to raise debt or equity. I think it's going to be hard for Lucid and Canoo to make any sort of reasonable recovery. There are too many good EV manufacturers fighting for too few customers at the moment.
QuantumScape is an even bigger risk, and until I see traction, it's not a stock I'm going to be buying, especially as the EV market drops.
