The painful truth of investing in EV companies

Except for Tesla, EV stock performed poorly in 2023.

Rivian, for example, is down 21% year-to-date and has declined nearly 64% since last April. Proterra performed even worse, down 67% YTD and nearly 82% since this time last year.

And it’s not just US electric vehicle manufacturers that are struggling. The S&P Kensho Electric Vehicle Index, which measures the top leaders in the global EV market, is down about 5% YTD and 37% since last April.

To put that into perspective, many traditional automakers, such as Ford and General Motors, see modest but positive gains in 2023. And the S&P 500 is up nearly 7% YTD.

Some might think this is a bad year for EV manufacturers. After all, interest rates are high, consumers are reluctant to take out auto loans, and supply constraints for battery metals have made the cost of producing EVs prohibitively high.

But these issues aren’t unique to 2023. In fact, high borrowing costs only exacerbate a painful truth for EV companies from the start: Electric cars are still too expensive for consumers to buy on a large scale, even if EV companies resume production. Worse – they’re too expensive for many EV companies.

Let’s look at these issues separately.

Nowhere is this more evident than at Tesla.

On April 2, Tesla reported first quarter delivery numbers of 422,875 vehicles. In other words, 422,875 consumers placed a Tesla order and did not cancel their order before the car arrived. During the same period, Tesla also produced 440,808 vehicles. That means the company produced about 17,933 more cars than it was able to sell.

This is not a new trend. From around mid-2022, demand for Tesla models, as measured by the size of its order backlog, has fallen sharply — even as the raw number of Teslas sold each year has increased. According to data from Troy Tesla — an independent analyst of Tesla’s production and delivery estimates — Tesla’s backlog of orders fell 77% from March 2022: from 470,000 units in March 2022 to 103,000 units in March this year.

Tesla’s competitors have also struggled to sell vehicles. For example, EV sedan maker Lucid Group produced 7,180 vehicles in 2022, but it delivered only 4,369. And EV truck producer Rivian produced 24,337 trucks but delivered 20,332.

Part of the problem is that all-EV companies are starting to cede market share to legacy automakers like Ford and Chevy. In 2022, Ford was the second largest EV maker with 61,575 vehicles sold, while Chevy sold 38,120 units of the Bolt. Ford even sold 15,617 units of its F-150 Lightning, which competes directly with Rivian’s truck.

Another problem is the price. In a high-interest rate environment, which makes car loans more expensive, car buyers may not be able to afford EVs at the rate they are being produced. For example, Rivian’s most affordable truck, the R1T, costs $69,300, while Ford’s F-150 Lightning is $59,974. By contrast, a gas-engine Ford Maverick XLT is $22,595 — 67% cheaper than Rivian’s truck.

Tesla has already cut prices five times since January and may cut again later this year. While that may be good news for EV buyers, it’s bad news for investors: Lower prices mean EV companies retain less profit on each vehicle they sell, narrowing profit margins that for some still don’t exist.

This brings us to the second problem with the EV stock.

Tesla It has a leg up on almost all EV competitors: the company actually Earn money. Everyone else is bleeding cash.

For example, Rivian lost $6.8 billion in 2022 and estimates it will lose another $4.3 billion in 2023. Looking at its most recent quarterly statement, we see that the company generated about $1.7 billion in revenue but spent about $4.8 billion to build 24,337 trucks.

How much does Rivian lose per truck? $1.7 billion would be roughly $84,000 in revenue per car (for the 20,332 it sold). However, it spent $4.8 billion to produce 24,337 vehicles, which works out to about $197,000 per truck. That means a loss of roughly $113,000 per Rivian sales

Other EV producers aren’t doing so well. In 2022, Lucid Group lost about $2.6 billion on revenue of $608 million. Even Ford reported losing about $2.1 billion on its EV sales last year.

One of the reasons these companies are bleeding cash is the cost of battery materials EV companies need important metals – such as lithium, cobalt, nickel and copper – to make lithium-ion batteries. These metals are in high demand, not only for the needs of EV companies but also for other industries They need it: Solar panel manufacturers, wind turbine companies, chipmakers, data centers, battery storage facilities and 5G network providers all need the critical metal.

There are deposits of lithium in Nevada, USA, but currently there is not enough mining activity to extract it in large quantities. That means EV companies are relying on foreign mining companies to extract and process the metal. US EV manufacturers also rely on China to use these metals to make batteries, and it’s not hard to see why production is so expensive. Even Tesla, which has invested heavily in its manufacturing capacity, still relies on Chinese mining company Ganfeng for some of its lithium.

It’s a hard truth to swallow, but some EV startups won’t be around 10 to 15 years from now.

If you decide to invest in EV stocks in 2023, be sure to take a close look at EV company fundamentals: its earnings, costs and profitability potential. Some EV stocks may look cheap this year, but if they don’t have long-term prospects, they may not be a smart investment.