Electric vehicles (EVs) are all the rage in 2021 and 2022. Rivian (RIVN -0.97%), Clarity (LCID 1.76%), Nio (Nio -4.51%)and many other products on the market. Tesla (TSLA 2.46%) Suddenly it became one of the most valuable companies in the world.
But 2022 brought reality to the market. Growth stocks fell in value, and EV stocks fell with it. The challenge in 2023 is to turn potential into profit. This may be easier said than done in the EV industry.
Legacy automakers aren’t giving up without a fight
The EV market has been dominated by Tesla for over a decade and has little competition.like car makers general motors (GM 2.60%) When Nissan There were EVs, but they often lacked range and were underpowered compared to Tesla vehicles.
That’s starting to change with the launch of new EVs from the companies mentioned above. Volkswagen Group (VWAGY 2.00%)GM, ford (F 2.69%)Kia and even BMW (BMWYY 2.02%)Tesla is losing market share (although it’s still growing), and traditional automakers are happy to welcome back buyers.
As EV production ramps up, competition will only intensify. The F-150 Lightning and Mustang his Mach E are Ford’s hits. VW’s ID.4 and Audi e-tron are the first products of the Volkswagen Group’s multi-year EV expansion strategy. A number of other models will also hit the road in the coming years.
As competition increases, companies will fight for the same customers. This means higher EV prices and lower margins are likely. And there are already signs that trouble lies ahead.
expensive cars will take a hit
A headwind facing all automakers is rising interest rates. Interest rates on both 3-year and 10-year Treasuries have risen sharply compared to last year, making it more expensive to borrow a car, shown below.
10-Year Treasury Yield, YCharts data.
This has two implications for the automotive industry. One is that any transaction is more expensive. This forces the buyer to trade in for a cheaper vehicle or wait a little longer to purchase.
A second effect of higher interest rates is that homes and stocks are devalued, leaving people with absolutely no money to buy a car. This could slow or even decrease EV sales growth in 2023.
We are already seeing an impact on both volume and price. Tesla has slashed the price of its cars in China by nearly 20% as it appears there is a price war going on. The same dynamic could eventually reach the US and Europe.
not everyone survives
Not all public EV companies will survive the next decade. There aren’t enough buyers for every vehicle on the market.
The graph below shows the names of the three large EVs, Rivian, Lucid, and canoe (GOEV -6.84%) –It’s burning now. They can’t keep this up forever.
RIVN free cash flow; data by YCharts.
It is not clear which companies will create profitable businesses and which will go bankrupt or be acquired by larger companies. However, some companies may not survive long, so be careful when buying baskets of EV stocks.
show me money
Most of the new EV makers aren’t profitable, but it’s fine to wait until the company is sustainably profitable before buying. With recent price cuts and incredibly high valuations compared to traditional automakers, Tesla’s profitable business is also in question.
I don’t think now is the time to buy EV stocks. This is a manufacturing industry, and such companies typically do not respond well to rising interest rates and economic recessions. The industry is not immune to it, so unless I see significant value in EV stocks, I would stay away.
Travis Hoium holds a position at General Motors and has the following options: The Motley Fool has positions in and recommends Nio, Tesla and Volkswagen Ag. The Motley Fool recommends Bayerisch Motoren Werke Aktiengesellschaft. The Motley Fool’s U.S. headquarters has a disclosure policy.
