Is The Boom In Electric Car Stocks Over?

Thursday, October 15, 2020 1:13 PM | Neal Farmer

Electric vehicles (EVs) have been a growing trend for a while now. Tesla (TSLA) initially led the change from traditional, gas-powered, vehicles. In the past couple of years and especially since the pandemic, EVs have surged in popularity as a result of the demand for more environmentally conscious vehicles.

Recently, one thing that's perhaps more popular than buying an electric car is investing in electric-vehicle manufacturers. Tesla (TSLA) stock more than tripled from April to August alone. Nikola Corporation (NKLA) saw its share price move from $12 in April all the way to $79 by June. Even Hyliion (HYLN) has seen its stock grow from around $10 to $55 during a similar timeframe.

Investors are always looking for the Next Big Thing, and a shift to electric vehicles would be a huge change for the automotilee industry. Tesla has shown that selling strictly electric vehicles can lead to a profitable business. However, the craze around EV stocks has seemingly died down in recent months with the most-popular stocks down over that time. Is this the end of the electric vehicle stock boom, or just a short market correction?

Why Did EV Stocks Rise So Fast?

Well Tesla reported its first full year of profitability in July which got many investors more optimistic of the company.  Tesla's newer vehicle models are targeted at people outside of the traditional electric car market. The Model 3 is bringing down the starting price to own a Tesla. Previously Tesla had been an exclusively luxury automotive brand but with the Model 3 starting around $35,000, it has opened the door to a lot more people, while the Cybertruck's aggressive styling seems targeted toward a more aggressively masculine demographic the stereotypical electric car buyer. Tesla CEO Elon Musk seems intent on continuing to drive prices down, and Tesla’s growth should help the company take advantage of economies of scale.

Still, a more than tripled share price right in the middle of a global pandemic doesn't seem to be too rational especially for an extremely cyclical business. Given that many of Tesla’s profits were also due to companies taking advantage of government credits for electric cars, it becomes pretty clear that Tesla’s surge in price is mostly from speculation on its future and less about investors finding hidden value.

Nikola, Hyliion, and others saw major share-price increases with minimal performance to back it up. Most of these businesses are still extremely new and some have yet to produce a single car for sale. News announcements from the big players are what drove so many investors to EVs and sent share prices soaring.

Is it Time to Buy EV Stocks?

Almost all electric vehicle companies have seen their share prices fall in the past couple months. The market as a whole is yet to get back to where it was in early September but EVs were hit much harder. Some might assume that the trend toward EV stocks is over. In reality though, this seems more like a market correction that needed to happen as share prices for these companies become laughably over inflated.

The whole market experienced a correction in September, and for good reason, as there are not a whole lot of good arguments that the market should be higher today than it was in January before Covid-19 became a global pandemic. There was a massive recovery in many sectors from the February lows. Tesla was one of the hardest hit on the way down and was one of the biggest winners in the recovery.

September's correction saw a lot of high-flying stocks get pulled own, and Tesla and the other EV stocks definitely fell into that category.

It seems that EV stocks can be looked at the same way as many speculative technology stocks, they go up faster than the market when things are looking good and investors are bullish on new technology, but when things start to look shaky and investors start to look for safety EV stocks lead the way down.

Why Are EVs Down Now?

Shares of Nikola and Hyliion are both down more than 50% from their highs set earlier in the year. while Tesla is about 10% lower than its high. This is what should be expected if the market goes bearish as Nikola and Hyliion carry much more risk than an established company like Tesla. Tesla’s size and brand offers investors much more stability than these newcomers, but it still carries significant risk.

Summary

The trend is likely to continue for EVs. The rally isn't over but rather is experiencing a temporary shutdown (much like the entire world right now). Expect investors to go back to these stocks once market sentiment turns more bullish.

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