(Bloomberg) — The electric-vehicle industry that once spawned multibillion-dollar enterprises is becoming a difficult place for investors as growth rapidly slows.
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Shares of cash-burning startups Rivian Automotive Inc. and Lucid Group Inc. have tumbled nearly 90% since the heyday of late 2021, wiping out a combined $217 billion of shareholder value. This year, an index of global EV-makers and suppliers is trailing the broader US market by the most since its inception in 2015.
“EV investors may start to wonder if they are in the right theme at the wrong time,” said Nick Colas, co-founder of DataTrek Research.
As money managers sift through the mess and brace for the sector’s toughest test yet in 2024, Tesla Inc. still stands out as the best option among US EV stocks. While scrutiny of its technology has led to a recall of 2 million vehicles, the Elon Musk-led company has been the best-performing US stock in the Bloomberg Electric Vehicles Price Return Index this year by a long shot and one of the biggest gainers in the S&P 500 Index.
“Tesla remains (and will continue to remain) king of US EVs, as the ‘rise of others’ and the ‘incoming competition’ that’s been discussed for years has still not taken place,” Evercore ISI’s automotive analyst Chris McNally wrote in a note on Dec. 11.
Concern about EV demand intensified in October, when Tesla dialed back its growth expectations, and automakers, EV suppliers and even car-rental companies across the globe followed with their own dire outlooks. The overarching worry is that the pool of enthusiastic first-adopters has been tapped out, and that high prices and a possible recession will deter mainstream buyers.
Deutsche Bank AG’s Emmanuel Rosner estimates that EVs will comprise 9% of US auto sales in 2024, down from a prior forecast of 11.8%. It means that after growing at about a 50% rate in 2023, sales growth will slow to slightly below 30% in 2024, before picking up again in 2025.
Tesla will hardly be unscathed. Its annual profits will fall by nearly a quarter this year after a series of price cuts on its cars, analysts project. While 2024 earnings are estimated to rebound, they are seen staying below 2022 levels. The pace of revenue expansion, while still far above legacy peers like Ford Motor Co. and General Motors Co., is also poised to slow considerably.
Despite that, Tesla boasts profit margins that exceed its rivals, a still-strong revenue trajectory, a big cash pile and a relatively small debt load.
Looking ahead, Wall Street estimates its revenue will climb at least 20% yearly through 2027, down from more than 50% in 2022, data compiled by Bloomberg show. That number is in the low- to mid-single digits for Ford and GM. And while startups like Rivian and Lucid will see revenue rise much faster than Tesla, their cash burn and much smaller sales volumes make them risky bets in an industry-wide slowdown.
“I just do not see how any other EV maker can sell these vehicles at a lower price and still survive,” Brian Mulberry, client portfolio manager at Zacks Investment Management, said of Tesla. Zacks, which manages about $15 billion, held around 292,000 Tesla shares as of the end of September.
After getting slammed in 2022, the stock has jumped 92% this year through Tuesday, compared with a 21% advance in the S&P 500.
Meanwhile, traditional automakers such as GM and Ford are on a colossal spending spree to catch up in EVs.
Morgan Stanley’s Adam Jonas found that the two companies spend the equivalent of their market capitalizations in 1.9 years and 2.6 years, respectively, on capital expenditure and research and development. An average S&P 500 company takes about 50 years to spend its own market valuation on those areas, and for Tesla that number is 69.4 years.
“This cannot continue,” he wrote of GM and Ford in a research note late last month. He sees “2024 as a year that may determine the long-term relevance” of the US legacy auto companies given their rising capital expenses.
Still, Tesla’s lofty valuation — which reflects expectations the company will be a major provider of self-driving technology — muddies the picture.
That artificial-intelligence potential built into the stock may leave little room for it to climb further, as Wall Street’s essentially flat 12-month price target on the shares suggests. The firm has faced escalating scrutiny of its automated-driving systems from the top US auto-safety regulator, with the latest blow coming on Wednesday when Tesla announced its biggest recall ever, related to its self-driving technology. Shares of the company fell as much as 2% on the news.
“Tesla has a strong balance sheet and is well-positioned to ride out the 2024 EV winter, but I worry that it may not be able to keep up with the rest of the technology space,” said Ivana Delevska, chief investment officer at Spear Invest. “The current valuation assigns significant value to the full self-driving technology, which is not something we expect to materialize in the near future.”
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–With assistance from Subrat Patnaik and David Watkins.
(Adds details, stock move in seventeenth paragraph.)
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