The Painful Truth of Investing in EV Companies

Aside from Tesla, EV shares have carried out dismally in 2023.

Rivian, as an illustration, is down 21% yr to this point and has slipped nearly 64% since final April. Proterra has carried out even worse, dropping 67% YTD and nearly 82% since this time final yr.

And it’s not simply U.S. electrical automobile makers which might be struggling. The S&P Kensho Electrical Automobiles Index, which measures prime leaders within the world EV market, has additionally dropped about 5% YTD and 37% since final April.

To place that in perspective, many conventional carmakers, equivalent to Ford and Basic Motors, have seen modest however constructive positive aspects in 2023. And the S&P 500 is up roughly 7% YTD.

Some might imagine it is only a unhealthy yr for EV makers. In any case, rates of interest are excessive, customers are sheepish about taking out auto loans, and provide constraints for battery metals have made the price of producing EVs exorbitantly excessive.

However these issues aren’t distinctive to 2023. In truth, excessive borrowing prices have solely exacerbated what has been a painful reality of EV corporations for the reason that starting: Electrical vehicles are nonetheless too costly for customers to purchase on a mass scale, even when EV corporations rev up manufacturing. Worse — they’re additionally too costly for a lot of EV corporations to make.

Let’s have a look at these issues individually.

Nowhere is that this extra clear than with Tesla.

On April 2, Tesla reported a first-quarter supply variety of 422,875 autos. In different phrases, 422,875 customers ordered a Tesla and didn’t cancel their order earlier than the automotive arrived. In the identical interval, Tesla additionally produced 440,808 autos. Meaning the corporate produced roughly 17,933 extra autos than it was capable of promote.

This isn’t a brand new pattern. Since about mid-2022, demand for Tesla fashions, as measured by the dimensions of its order backlog, has declined drastically — even because the uncooked variety of Teslas offered has grown annually. In accordance with knowledge obtained by Troy Teslike — an unbiased analyst of Tesla manufacturing and supply estimates — Tesla’s backlog orders have dropped 77% since March 2022: from 470,000 models in March 2022 to 103,000 models in March this yr.

Tesla’s rivals have additionally struggled to promote autos. As an example, EV sedan maker Lucid Group produced 7,180 autos in 2022, nevertheless it delivered solely 4,369. And the EV truck producer Rivian produced 24,337 vans however delivered 20,332.

A part of the issue is that all-EV corporations are starting to cede market share to legacy carmakers, like Ford and Chevy. In 2022, Ford was the second-largest EV maker, with a sale of 61,575 autos, whereas Chevy offered 38,120 models of the Bolt. Ford even offered 15,617 models of its F-150 Lightning, which competes straight with Rivian’s vans.

One other drawback is worth. In a high-interest-rate setting, which makes automotive loans costlier, automotive customers could not be capable of buy EVs on the charge they’re being produced. For instance, Rivian’s most inexpensive truck, the R1T, prices $69,300, whereas Ford’s F-150 Lightning is $59,974. In contrast, a gas-engine Ford Maverick XLT is $22,595 — 67% cheaper than Rivian’s truck.

Tesla has already lower costs 5 instances since January and should lower them once more later this yr. Whereas that could be excellent news for EV consumers, it’s unhealthy information for buyers: Decrease costs imply EV corporations retain much less revenue on each automotive they promote, narrowing revenue margins that for some don’t even exist but.

That leads us to the second drawback with EV shares.

Tesla does have a leg up on almost all of its EV rivals: The corporate is definitely creating wealth. Everybody else is bleeding money.

For instance, Rivian reportedly misplaced $6.8 billion in 2022 and estimates it’s going to lose one other $4.3 billion in 2023. Wanting into its most up-to-date quarterly assertion, we see the corporate generated roughly $1.7 billion in income however spent round $4.8 billion to provide 24,337 vans.

How a lot did Rivian lose per truck? $1.7 billion would have been roughly $84,000 in income per automobile (for the 20,332 it offered). Nevertheless, it spent $4.8 billion to provide 24,337 autos, which comes out to round $197,000 per truck. Meaning Rivian misplaced roughly $113,000 per sale.

Different EV producers aren’t doing a lot better. In 2022, Lucid Group misplaced round $2.6 billion on a income of $608 million. Even Ford reported dropping roughly $2.1 billion on its EV gross sales final yr.

One motive these corporations are bleeding money is the price of battery supplies. EV corporations want vital metals — equivalent to lithium, cobalt, nickel and copper — to construct lithium-ion batteries. These metals are in excessive demand, not solely as a result of EV corporations want them but additionally as a result of different industries want them: photo voltaic panel producers, wind turbine corporations, chipmakers, knowledge facilities, battery storage services and 5G community suppliers all want vital metals.

The U.S. has deposits of lithium in Nevada, nevertheless it at the moment doesn’t have ample mining operations to extract massive portions. Meaning EV corporations are relying on overseas mining corporations to extract and course of metals. Toss in the truth that U.S. EV makers additionally rely on China to then make these metals into batteries and it’s not onerous to see why manufacturing is so costly. Even Tesla, which has invested closely in its manufacturing capability, nonetheless depends upon the Chinese language mining firm Ganfeng for a few of its lithium. 

It’s a tough reality to swallow, however some EV startups gained’t be round 10 to fifteen years from now.

In case you determine to spend money on EV shares in 2023, make sure to look carefully on the EV firm’s fundamentals: its revenues, prices and the chance of reaching profitability. Some EV shares will look low-cost this yr, but when they don’t have long-term potential, they won’t be a sensible funding.