Most electric vehicle (EV) stocks are trailing the market in 2022, as equity investors are impacted by various macroeconomic factors. Shares of EV companies such as Tesla (NASDAQ: TSLA), Lucid Motors (NASDAQ: LCID), and Rivian (NASDAQ: RIVN) are currently trading 47%, 71%, and 85% below all-time highs, respectively.
Despite the sell-off, most EV companies remain vulnerable and might continue to move lower in 2022. So let's see what factors might lead to further decline in EV stocks going forward.
Commodity prices have gained significant momentum in the last year due to supply chain disruptions. Additionally, Russia's invasion of Ukraine has accelerated inflation concerns while driving nickel prices toward record levels.
Russia is one of the world's largest nickel producers and is now facing extensive economic sanctions from several countries. Nickel is a critical component for electric vehicle manufacturers and is used in the production of lithium-ion battery cells. In March, the London Metal Exchange suspended nickel trading after three-month contract prices increased more than 100% to $100,000 per tonne.
Morgan Stanley analyst Adam Jones expects the surge in nickel prices to increase input costs for EV manufacturers to rise by $1,000 in the U.S. Nickel prices were already gaining pace even before the Ukraine invasion, and market experts estimated demand for the commodity to outpace supply by 2024.
Due to rising input costs, Rivian announced it would increase the prices of vehicles pre-booked by customers, sending its stock lower in March as investors were unimpressed.
If electric vehicle manufacturers absorb the costs, it will negatively impact profit margins. Alternatively, transferring these costs to consumers will result in subdued demand.
In addition to higher commodity prices, EV stocks will also be hurt by rising interest rates. Last week, the Federal Reserve hiked interest rates by 0.75%, the largest increase since 1994. To benefit from economies of scale, EV manufacturers will have to expand production capabilities at a fast clip. However, an uptick in borrowing costs will lead to a lower bottom line.
Further, most EV manufacturers, including Rivian and Lucid Motors, still report massive losses and are yet to turn profitable. As a result, these companies may raise equity capital to fund expansion plans, diluting shareholder wealth.
The COVID-19 pandemic led to the temporary shutdown of manufacturing units globally, resulting in lower production numbers.
In Q1 of 2022, several Chinese provinces imposed lockdowns due to the country's zero COVID-19 policy, exacerbating these disruptions further. China is the world's manufacturing hub, and its strict lockdown policies will continue to weigh heavily on manufacturers across various sectors, including electric vehicles.
While the near-term outlook for EV stocks might not be encouraging, the sector is well poised to benefit from several secular tailwinds in the upcoming decade. The widespread adoption of electric vehicles globally will expand the total addressable market for companies part of this sector to $1.31 trillion in 2028, compared to $287.4 billion in 2021, according to a report from Fortune Business Insights, making stocks such as Tesla solid long-term bets right now.
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