Shares of leading electric vehicle (EV) stocks Tesla (TSLA -1.11%), Rivian Automotive (RIVN 6.10%), and Lucid Motors (LCID 0.41%) were all down big today, declining 5.7%, 6.4%, and 4.5%, respectively, as of 1:55 p.m. ET.
The common theme among these EV leaders is that analysts are now turning bearish on the group following tepid earnings results, as higher interest rates dent these stocks' relatively high values while also hurting demand for EVs. Higher interest rates on car loans make EVs a more difficult purchase for consumers, given that EVs still generally cost more than internal combustion cars upfront.
High stock prices add execution and economic risk
Electric vehicle stocks, in general, tend to garner much higher valuations than traditional auto companies, given the perceived long-term growth prospects of the space. However, as is now becoming clear, that demand may not be linear, and the high capital costs involved in auto production also add risk.
Nowhere is that more apparent than Tesla, which is already the most valuable auto company in the world, with a much higher valuation than any other auto stock. That attracted skepticism today from HSBC analyst Michael Tyndall.
Tyndall initiated coverage on the stock today, with a "reduce" rating as well as a $146 price target -- about 30% lower than Tesla's stock price to start the day.
Tyndall's criticism of Tesla isn't so much due to its innovation capabilities in EVs, but rather its valuation. More specifically, Tyndall's modeling indicates nearly half of Tesla's value is tied to innovations in autonomy and robotics, which likely won't see any material revenue and profits until the end of the decade at best. Given that these new products have high technology, regulatory, and competition risk, it's difficult to assign a value to them. Tyndall goes on: "Our DCF [discounted cash flow] valuation is generous as we assume businesses such as FSD [full-self driving], Dojo and Optimus all become successful by the end of the decade, contributing around 40% of our DCF value. We think, however, that the expected cost of capital for these businesses should be well above the group average given the regulatory and technological challenges they face."
Importantly, Tyndall also added that Musk's proclivity to make controversial comments and his ventures outside of Tesla increase Tesla's brand risk.
Images source: Getty Images.
But Tesla wasn't the only EV maker getting slapped with a downgrade today. Rivian saw its price target reduced from $25 to $19 by D.A. Davidson analyst Michael Shlisky, who maintained the firm's neutral rating on the stock. Barclays analyst Dan Levy also lowered his price target from $30 to $27, albeit sticking with an overweight rating.
Shlisky noted that while he was encouraged by Rivian's recent production and delivery updates, he has grown skeptical of Rivian being able to further penetrate the commercial van market outside of consumer SUVs. Interestingly, Levy didn't really have many criticisms of Rivian, so his lowered price target may have to do more with cost of capital concerns, or Rivian's recent surprise convertible bond offering in October, which will dilute shareholders.
Finally, Lucid Motors continued its decline after it received several downgrades yesterday following its Tuesday earnings release, and today's downgrades of both Tesla and Rivian likely aren't helping sentiment for the sector generally.
In its Tuesday release, Lucid surprised analysts by missing revenue by a wide margin, while also lowering its production outlook for 2023 from 10,000 vehicles to between 8,000 and 8,500. Based on management commentary, that's likely a demand problem, not a production problem, given the uncertain macroeconomic environment, adding to concerns over the sector.
Electric vehicle stocks: Opportunity or bursting bubble?
A financial industry report recently noted that these leading EV stocks saw a big tick up in short selling during the month of October, and it appears that short-selling pressure is weighing on these stocks in November as well.
Of course, if results and sentiment turn, a higher short interest could lead to an explosive rally.
However, given the dual headwinds of higher interest rates and questions over EV adoption in the mass market outside of early adopters, investors may want to stay cautious on these names.
Furthermore, as the EV market matures, investors should probably see EV stock valuations narrow toward those of established legacy automakers. That being said, EV plays should probably maintain somewhat of a premium, provided they make it to a sustainably profitable stage.
