what happened
The auto industry’s high-growth companies performed well during the pandemic, but are quickly returning to reality as interest rates rise and car sales slow in 2023. Today was no exception, as electric vehicle (EV) stocks plummeted, and so did cars. Retail company.
Three made the biggest moves. canoe (GOEV -5.30%), haizon motors (hisun -7.31%)When Calvana (CVNA -8.24%)also decreased by 8.3%, 9.9% and 13.7% respectively.
So what
The automotive market experienced a major speculative bubble in 2020-2022. Now is the time for companies to show that they can build sustainable businesses. If so, the rubber is hitting the road.
Stocks have seen some gains recently on the back of falling interest rates, and we expect the Federal Reserve to be forced to cut interest rates soon, but the speculative phase is coming to an end. Earnings season will begin and investors will feel how good or bad these companies are performing.
Recent news does not indicate good news for these companies. Tesla slashed prices around the world, and the value of used Teslas plummeted. This likely indicates that Tesla doesn’t have enough demand to meet supply, which could mean Canoo and Hyzon struggle to increase demand.
Carvana is losing money selling a used car that should have been profitable from day one. No amount of growth can hide negative profit margins, and if the value of used cars falls, the company can quickly run out of cash.
CVNA Operating Margin (TTM) Data by YCharts
As you can see above, all three companies are losing money from their operations. These companies have lost market value and lack places to raise capital, so they are not sustainable.
So
Used car prices are falling, and automakers are increasing the supply of new vehicles, putting pressure on prices. At the same time, these companies have no existing cash flow to rely on.
I think the challenges for these companies will become even more difficult due to business and market declines. When a company needs funds to keep its business running, it can go to the bond market or the stock market. But for all three companies, those options may be closed.
These companies have a market cap of between $400 million and $700 million, making it difficult at this point to raise enough money to even fund a few quarters of operations.
I don’t think this is the time to bet on loss-making speculative companies. The auto business will only get more competitive over the next year, and some companies may not survive. It’s better not to risk losing all your capital if you miss the first part of the rally than to buy a company that’s really in trouble.
Travis Hoium has the following options: The Motley Fool owns shares of and recommends Tesla. The Motley Fool’s U.S. headquarters has a disclosure policy.
