Tesla, EV investors face a reckoning

28.10.2023 - 05:03 / tech.hindustantimes.com / Elon Musk

The electric-vehicle boom that spawned multibillion dollar startups overnight and pushed Tesla Inc.'s value into the stratosphere is starting to flounder just a few years after it began.

A key theme from this earnings season is the waning demand for electric cars. First was Tesla's grim earnings report last week, that was followed by dour commentary from General Motors Co., Mercedes-Benz Group AG, Honda Motor Co. and car-rental company Hertz Global Holdings Inc. 

The shift has been sobering for investors, as the valuations of most EV stocks assume a rapid industry expansion. Should that fail to materialize, share prices will likely unwind and many startups won't be able to rely on the capital markets to fund their unprofitable ventures.

“People were always too aggressive on EV adoption,” said Craig Irwin, analyst at Roth Capital Partners. “What we have now is a market adjustment, a recalibration back to reality.”

While Tesla Chief Executive Officer Elon Musk placed the blame on high interest rates, others pointed to demand. GM said it was rethinking goals as EV sales were slower than anticipated, and Honda shelved plans to develop affordable EVs with GM. Mercedes called the EV price war “brutal” and unsustainable, and Hertz said it will slow the pace of buying these cars due to high repair costs. 

At the same time, Wall Street analysts downgraded EV-exposed companies such as lithium suppliers and charging station operators. 

“EVs had a grace period of initial demand enthusiasm, but that appears to be over,” said Nicholas Colas, co-founder of DataTrek Research. 

The warning signs appeared early this year as Tesla started aggressively cutting prices in an effort to shore up demand. That sparked a price war as other EV-makers followed, eating into profitability for some carmakers and pushing up already steep losses for others. 

But demand stayed weak despite the lower prices, leading some to conclude that the pool of “first-adopter” consumers may have been tapped. Then there are other hurdles like high interest rates and expensive car loans, still inconsistent charging networks and the relatively fewer electric models available.

Even the global political push for cleaner transportation options isn't making a difference for auto companies. 

“Consumers have the final word on where pricing has to go,” Colas said. “If demand is already faltering, then margins are going to be tight from here on.”

The stocks have started to reflect those concerns. Tesla shares are down 14% since reporting results on Oct. 18, and Rivian Automotive Inc. and Lucid Group Inc. have both retreated over 10% in the wake. The S&P 500 Index fell 4.4% in the same period. All are trading well below their record highs, touched in late 2021 amid a