Wall Street sours on EVs as demand falters

Electric vehicles may be seen as crucial to the future of transportation, but it’s been a rough stretch for investors in stocks tied to the sector.

First, industry giant Tesla Inc. warned of growth troubles last week, then General Motors Co. said it was rethinking its EV growth plans as sales have been slower than expected. Now analysts across Wall Street are dialing back expectations for all kinds of companies exposed to EVs, citing weakening demand amid headwinds like rising borrowing costs.

The upshot is that EV stocks have begun to nosedive, after leading the broad market early in the year. The Bloomberg EV Price Return Index, which tracks global EV stocks, has tumbled almost 7% since October 18 when Tesla reported, compared to a roughly 2.5% drop in the S&P 500 Index.

“Over the last 12 months we have seen significant revisions in the growth rate for EV sales,” said Piper Sandler analyst Charles Neivert.

On Wednesday, he downgraded Albemarle Corp. and Livent Corp. — both of which supply lithium, one of the key raw materials in EV batteries — to the equivalent of a hold rating from that of a buy.

“At this point, most of the first adopter surge has taken place and there is a realization that the next set of buyers has not stepped into the market to the degree anticipated,” Neivert said.

Borrowing Costs Bite
He cited higher interest rates and the fear of recession as contributing to buyers’ hesitancy, showing how surging borrowing costs are wreaking havoc on the still-nascent EV industry, which is largely comprised of startups and smaller businesses.

That strain is two-fold: Climbing rates make car loans more expensive, but they also make it harder for the companies to raise capital.

“Rising interest rates continue to inflict damage to sentiment and pressure those requiring capital raises to execute business plans,” TD Cowen analyst Gabe Daoud wrote in a note to clients on Wednesday.

He downgraded charging company EVgo Inc. and lithium-ion battery maker Freyr Battery SA to the equivalent of a hold from buy. Separately this week, battery recycling company Li-Cycle Holdings Corp. said it would pause construction on a plant, citing escalating construction costs.

Daoud said that despite record US EV deliveries this year, businesses appear to be spending less discretionary capital, suggesting there will be fewer charging installations near term.

Underscoring how affordability is an issue, and not just for EVs, Daoud noted that US light vehicle prices are now 33% higher than the first quarter of 2018. He said the cost could rise further as interest rates remain elevated and labour strikes at Detroit carmakers drive spur vehicle imports.

Tesla, which has been lowering prices on its EVs to boost demand, has also been seeing those cuts lose their power to drive sales.

“Higher interest rates/rising cost of capital and a slowing EV market may continue to expose a number of projects and business models that may struggle to bridge the gap to self-funding status,” Morgan Stanley analyst Adam Jonas said this week.

Jonas flagged EV-makers Fisker and Lucid Group, battery company QuantumScape and Freyr as requiring significant external funding or financing to expand operations while absorbing years of losses.

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