/charging%20-%20andrew-roberts-2JvEjF0tf50-unsplash.jpg)
After a stellar rally in July, electric vehicle (EV) stocks have fallen in recent days. While the broader markets have also come off their highs, growth names like EV stocks have dropped sharply. Though the green energy ecosystem – of which EV companies are a part – holds long-term promise thanks to the global pivot towards sustainability, I believe Lucid Motors (LCID) and Nikola (NKLA) are two EV stocks that investors should avoid as the broader markets weaken.
EV Companies Continue to Post Losses
To begin, it is important to understand that the EV industry is facing several headwinds – including slower-than-expected EV adoption, rising competition, and the worsening price war, just to name a few.
Barring Tesla (TSLA), none of the major pure-play EV companies has been able to turn profitable - while legacy automakers’ EV operations also continue to lose billions every year. Ford (F), which is much more transparent with its EV losses and reports the segment’s results separately as “Model e,” expects the business to lose $4.5 billion in 2023 - 50% higher than its previous guidance, and over twice the 2022 losses.
While legacy automakers have the “luxury” of their hugely profitable internal combustion engine operations that can compensate for the EV losses, startup EV companies don’t have that option, and need a steady flow of cash to survive. The inability to raise cash can be fatal, as we recently saw with Lordstown Motors (RIDEQ) - which had to file for bankruptcy after Foxconn pulled out of a crucial funding deal.
Production and execution woes are not helping matters, as many EV startups which were once hyped as “Tesla-killers” struggle with producing vehicles efficiently.
Nikola’s Market Cap Surpassed that of Ford at the Peak
Nikola went public in 2020 through a special purpose acquisition company (SPAC) merger, and was among the first EV companies to list via this route (which eventually became quite popular with loss-making startup companies between 2020 and 2021, before the bubble finally burst).
At its peak in 2020, Nikola’s market cap surpassed that of Ford – which was a warning about an impending bubble in the EV industry, as Nikola hadn’t even started delivering its vehicles by then. Even now, the company has delivered only a handful of trucks.
Nikola has a troubled past. Just a few months after its listing, Hindenburg Research accused it of fraud and misrepresenting the ability of its vehicles. The company’s founder & CEO Trevor Milton resigned shortly after the allegations, and was subsequently found guilty of fraud.
The company’s leadership woes haven’t ended there. Its fourth CEO in as many years, Michael Lohscheller, stepped down earlier this month, citing “a family health matter.”
Nikola is Not the Best EV Stock Out There
Nikola has restructured its business, and managed to restrict the cash burn to just under $150 million in Q2 2023. It has also reduced its workforce, like most of its startup EV peers, and expects its annual cash usage to fall below $400 million by 2024.
Additionally, Nikola signed agreements with BayoTech and J.B Hunt Transport Services (JBHT) for purchasing its trucks.
However, these two agreements are for a mere 63 vehicles in total, and I believe Nikola is yet to prove its mettle. The company might look to raise more capital after it received a shareholder nod, which would lead to even more dilution – the company’s outstanding share count has already doubled since it went public.
Also, hydrogen-powered trucks - which Nikola is currently working on - are still quite a niche segment, unlike electric cars, which have gained relatively widespread adoption.
Given the many other options available in the EV industry, I believe that Nikola is one name that should be avoided, especially as the broader market rally takes a breather.
Lucid Motors has Backing from Saudi Arabia
Lucid Motors is another EV stock that I believe investors should avoid. To be sure, the company’s cars have received good reviews - MotorTrend awarded the Car of the Year 2022 award to Lucid Air, saying, “The win affirms Lucid Air as the new EV benchmark, with the most advanced electric powertrain available today — technology wholly designed, developed, and manufactured in-house.”
Luxury carmaker Aston Martin has also partnered with Lucid to buy electric motors and batteries – providing credence to Lucid Motors’ claim that it offers a world-class product, and just needs to market it better to increase sales.
Furthermore, Lucid is among the relatively well-funded startups, with cash and cash equivalents of $3.4 billion and total liquidity of $4.1 billion at the end of June. It also has backing from Saudi Arabia, which has poured billions into the loss-making venture – including $1.8 billion in 2023 alone.
Why Lucid Motors Stock Should be Avoided
However, the company continues to face demand woes, and recently lowered car prices to spur sales. While it has started deliveries to Saudi Arabia - which has committed to buy 50,000 vehicles, with an option to buy up to 100,000 units in total - Lucid still faces demand woes in the US. The company’s CEO Peter Rawlinson said during the Q2 earnings call that it has made progress in building its brand, after previously citing a lack of brand recognition for lower-than-expected sales.
However, the fact that Lucid is still constrained by demand – and not production – shows that it still has much ground to cover.
Finally, LCID's forward 12-months price-to-sales multiple of 12.62x also looks on the high side. While rumors of the company being eventually acquired by Saudi Arabia - which already holds a mammoth 68.5% stake in the company - might continue to persist, I would still avoid the stock at this price level.
On the date of publication, Mohit Oberoi had a position in: F . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
