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Electric vehicle stocks such as Tesla (NASDAQ: TSLA) and NIO (NYSE: NIO) crushed the broader markets in 2020 on the back of long-term optimism surrounding this segment. While Tesla is the largest EV manufacturer globally, China is the world’s largest market for battery-powered vehicles making companies including Li Auto (NASDAQ: LI) and NIU (NASDAQ: NIU) top bets.
Moreover, new entrants such as Rivian (NASDAQ: RIVN) and Lucid Motors (NASDAQ: LCID) went public recently and touched record highs in 2021, before losing momentum in recent months. Most electric vehicle stocks are trading significantly below all-time highs right now but remain vulnerable for a number of reasons.
Rising nickel prices will impact electric vehicle demand
In the last year, commodity prices have surged higher due to supply chain constraints impacting global markets. Further, the ongoing war between Russia and Ukraine has exacerbated these issues driving nickel prices significantly higher. In fact, earlier this week the London Metal Exchange suspended trading of Nickel after three-month contract prices rose over 100% to $100,000 per ton.
Russia is a major supplier of Nickel and the country is facing extensive sanctions from multiple countries. A critical ingredient used to produce lithium-ion battery cells, nickel is a key component for electric vehicle manufacturers. According to Morgan Stanley (NYSE: MS) analyst Adam Jones the increase in nickel prices will proliferate input costs of EVs by $1,000 in the United States.
In case, electric vehicle companies absorb these costs, the bottom-line of manufacturers will take a hit. Alternatively, consumer demand will remain tepid in case the selling prices of EVs increase in 2022.
The supply glut and resultant increase in prices may also delay expansion plans of legacy automobile giants such as Ford (NYSE: F) and General Motors (NYSE: GM) in the EV space.
Even prior to Russia’s invasion of Ukraine, nickel prices were expensive and experts warned global demand for high-grade nickel may outpace supply by 2024, a message that has gotten louder in the last two weeks.
Shares of Rivian were under the pump after the company disclosed it will increase prices of electric vehicles pre-booked by customers. In fact, RIVN stock plunged by almost 15% in the last five trading sessions and is down 78% from all-time highs. Comparatively shares of Tesla and Lucid Motors are down 34.8% and 60% respectively after trading at record levels in 2021.
Inflation and interest rates
In addition to higher nickel prices, electric vehicle manufacturers will also have to wrestle with rising inflation numbers and the possibility of multiple interest rate hikes. Inflation rates are hovering close to 40-year highs which in turn will negatively impact consumer spending. In order to offset an inflationary environment, the Federal Reserve is expected to increase interest rates multiple times in 2022.
So, the borrowing costs for EV companies will move higher, hurting profit margins. But most EV manufacturers are still posting hefty losses each quarter as they aim to scale manufacturing capabilities over time. Higher interest rates coupled with mounting losses may result in companies raising equity capital to offset cash burn. But this strategy will result in shareholder dilution driving stock prices lower.
EV stocks in China are vulnerable
While China is aggressively supporting clean-energy investments the lack of transparency and regulations surrounding the country make investing in EV stocks an extremely risky bet. China has imposed lockdowns in several provinces due to rising COVID-19 cases, causing a sell-off in Chinese stocks listed in the U.S.
Right now, share prices of NIO, Niu and Li Auto are trading 76%, 83% and 55% below all-time highs.