Why Electric Vehicle Stocks Will Underperform In 2022?
March 17 2022 - 5:59AM
Finscreener.org
Electric vehicle stocks such
as Tesla (NASDAQ: TSLA)
and NIO (NYSE:
NIO) crushed the broader markets in 2020 on the
back of long-term optimism surrounding this segment. While Tesla is
the largest EV manufacturer globally, China is the world’s largest
market for battery-powered vehicles making companies
including Li Auto (NASDAQ: LI)
and NIU (NASDAQ:
NIU) top bets.
Moreover, new entrants such
as Rivian (NASDAQ:
RIVN) and Lucid Motors
(NASDAQ:
LCID) went public recently and touched record highs in
2021, before losing momentum in recent months. Most electric
vehicle stocks are trading significantly below all-time highs right
now but remain vulnerable for a number of reasons.
Rising nickel prices will impact electric vehicle
demand
In the last year, commodity
prices have surged higher due to supply chain constraints impacting
global markets. Further, the
ongoing war between Russia and Ukraine has exacerbated these
issues driving nickel prices significantly higher. In fact, earlier
this week the London Metal Exchange suspended trading of Nickel
after three-month contract prices rose over 100% to $100,000 per
ton.
Russia is a major supplier of
Nickel and the country is facing extensive sanctions from multiple
countries. A critical ingredient used to produce lithium-ion
battery cells, nickel is a key component for electric vehicle
manufacturers. According to Morgan Stanley
(NYSE: MS)
analyst Adam Jones the increase in nickel prices will proliferate
input costs of EVs by $1,000 in the United States.
In case, electric vehicle
companies absorb these costs, the bottom-line of manufacturers will
take a hit. Alternatively, consumer demand will remain tepid in
case the selling prices of EVs increase in 2022.
The supply glut and resultant
increase in prices may also delay expansion plans of legacy
automobile giants such as Ford (NYSE: F)
and General
Motors (NYSE: GM)
in the EV space.
Even prior to Russia’s invasion
of Ukraine, nickel prices were expensive and experts warned global
demand for high-grade nickel may outpace supply by 2024, a message
that has gotten louder in the last two weeks.
Shares of
Rivian were under the
pump after the company
disclosed it will increase prices of electric vehicles pre-booked
by customers. In fact, RIVN stock plunged by almost 15% in the last
five trading sessions and is down 78% from all-time highs.
Comparatively shares of Tesla and Lucid Motors are down 34.8% and 60%
respectively after trading at record levels in 2021.
Inflation and interest rates
In addition to higher nickel
prices, electric vehicle manufacturers will also have to wrestle
with rising inflation numbers and the possibility of multiple
interest rate hikes. Inflation rates are hovering close to 40-year
highs which in turn will negatively impact consumer spending. In
order to offset an inflationary environment, the Federal Reserve is
expected to increase interest rates multiple times in
2022.
So, the borrowing costs for EV
companies will move higher, hurting profit margins. But most EV
manufacturers are still posting hefty losses each quarter as they
aim to scale manufacturing capabilities over time. Higher interest
rates coupled with mounting losses may result in companies raising
equity capital to offset cash burn. But this strategy will result
in shareholder dilution driving stock prices lower.
EV stocks in China are vulnerable
While China is aggressively
supporting clean-energy investments the lack of transparency and
regulations surrounding the country make investing in EV stocks an
extremely risky bet. China has imposed lockdowns in several
provinces due to rising COVID-19 cases, causing a sell-off in
Chinese stocks listed in the U.S.
Right now, share prices of NIO,
Niu and Li Auto are trading 76%, 83% and 55% below all-time
highs.
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