What happened
Despite already being down for the week, shares of Tesla (TSLA -4.72%), Rivian (RIVN -6.22%), and next-generation battery maker QuantumScape (QS -3.88%) all fell again on Friday, down 4.2%, 5.4%, and 4.6%, respectively, as of 2:24 p.m. EST.
While each stock had its own negative news this week, there wasn’t anything especially newsworthy about any of them on Friday. Nevertheless, fears over the Federal Reserve’s latest interest rate hikes and the pressure that may put on consumer purchasing power next year sent shares of these growth stocks downward yet again.
In addition, Elon Musk’s recent Tesla share sales may be increasing pessimism over the whole sector, as no one knows if he is done selling yet.
So what
There was a bad combination of data released this week for any sort of growth-oriented consumer stock, especially those that make big-ticket items, which means basically every electric vehicle (EV) player.
While inflation came in lighter than expected on Tuesday, Fed Chair Jerome Powell maintained a very hawkish tone after the Fed’s meeting on Wednesday, suggesting no relief on interest rates just yet. At that meeting, the Federal Reserve raised the federal funds rate by another 50 basis points, following four straight 75 basis-point hikes in the previous four meetings, and actually increased its forecast for interest rates next year.
However, the next day, November retail sales came in much softer than expected, declining 0.6% month over month. That suggests the Fed is hiking into a rapidly slowing economy.
A weak economy and higher rates don’t bode well for big-ticket items such as vehicles, and higher interest rates also disproportionately hurt high-growth stocks with no earnings or those that trade at a high multiple of earnings. A lot of those types of stocks — and not just EV stocks — are down today. However, since a lot of new electric vehicle stocks have those attributes, they fell as well.
Thus, because Tesla trades at a price-to-earnings (P/E) ratio of almost 50, Rivian is still losing lots of money on its bottom line, and QuantumScape doesn’t even have revenues yet, let alone profits, all three stocks were hurt by this macrosentiment.
Of course, there was more to Tesla’s decline than just the macroeconomic overhang. CEO Elon Musk’s recent acquisition of Twitter is causing a firestorm of controversy, which is hurting Tesla’s stock in three different ways. First of all, in dealing with Twitter’s problems, Musk doesn’t seem as focused on Tesla during a tough time for the economy. Second, the content of Musk’s recent behavior and tweets may risk alienating a good portion of Tesla’s customer base, potentially harming the brand and its future growth prospects in the U.S.
On top of that, a Wednesday night filing showed Musk continued to sell more of his Tesla shares between Monday and Wednesday, totaling about $3.6 billion, or 5% of his stake.
Seeing the CEO sell shares when a stock is already down more than 50% on the year isn’t a great sign. Therefore, it’s no wonder shares are down again Friday, as investors may be abandoning the stock for fear of more selling. Additionally, Musk may not be through with his own sales.
Rivian also had an unfortunate announcement this week, announcing it would pull back from its partnership with Mercedes-Benz Group, which it had just announced in early September, in order to preserve cash. It was a strange about-face, as tight financial conditions were also present back in September when the partnership was announced. It has to make one wonder what Rivian is now seeing in the market. Of note, Rivian has lost over $5 billion through the first nine months of 2022 as it ramped up production ahead of revenues.
Rivian’s decline comes even as it got some good product news today: Its R1T electric pickup truck earned a Top Safety Pick+ from the Insurance Institute for Highway Safety (IIHS). The R1T earned a rating of either “Good” or “Superior” on a number of parameters related to crashes. Its emergency braking system, for example, received a “Superior” rating. Meanwhile, the R1T also released a software update today that pushes its range to a whopping 328 miles on a single charge, up 14 miles from the pre-updated battery.
Finally, QuantumScape (QS) is really not the stock for this type of environment, as it is a pre-revenue company working to develop solid-state batteries. Investors in QS are hopeful its solid-state designs will be superior to today’s lithium-ion batteries and capitalize on the growth of EVs in the future. However, when interest rates go up, customers pull back and investors hunker down into more profitable, income-producing stocks and bonds — far from the long-term risk associated with QuantumScape’s stock. The stock was downgraded earlier this week, and the bad day for tech stocks is bringing it even lower on Friday.
Now what
One might have thought that a future Tesla competitor such as Rivian would benefit from Tesla’s self-induced slip-ups this week. However, it appears that the macroeconomic headwinds may be overriding everything else. Investors have absolutely no appetite for profitless stocks these days amid higher interest rates and the increasing prospect of a recession.
Some may be looking to jump into the EV space while it’s down — and for good reason. The electric vehicle industry is set to accelerate over the coming decade, so buying these stocks when they are down may seem like a great contrarian move.
However, investors should also realize that this is a capital-intensive industry in which expensive manufacturing plants and research and development expenses must be made even prior to revenues and profits. With the capital markets essentially closed off, you have to make sure any stock you buy in this environment has the balance sheet and cash-flow prospects to make it through a recession without needing to raise more capital.
With so much uncertainty regarding all three of these stocks, it’s no wonder they are falling at year-end.
