Should you enter the EV space right now?
Subscribers to Chart of the Week received this commentary on Sunday, June 23.
On June 19, California-based electric vehicle (EV) startup Fisker (FSR) filed for Chapter 11 bankruptcy. The company had been left for dead since February, when an earnings report disclosed serious manufacturing issues and cashflow problems. FSR traded as high as $28.50 in February 2021, but spent the last 24 months in penny stock territory as it slogged through insurmountable debt.
We all remember the special purpose acquisition company (SPAC) deluge from the pandemic era, and how EV startups sprouted like weeds at the time. Fast forward to summer 2024, and the EV landscape is a barren wasteland, with even fearless leader Tesla (TSLA) looking awfully mortal. Is there anything left for options traders to pick over?
Before Fisker bit the dust, Lordstown Motors threw in the towel last September. Nikola (NKLA), last seen trading at a whopping 33 cents per share, is circling the drain, after former CEO Trevor Milton was sentenced to four years in prison back in December for misleading shareholders about the truck-based EV’s technology.
The other remnants are merely surviving. Per the table below, Lucid Motors (LCID), Rivian Automotive (RIVN), Nio (NIO), and Li Auto (LI) are all deep in the red for 2024 and well off their all-time highs from 2020 or 2021. And while Rivian SUVs are growing in popularity and Lucid is bankrolled by public investment fund (PIF) from Saudi Arabia, the former whiffed on its most recent quarterly estimates and the latter’s production forecast fell short of projections. China-based Nio and Li are treading water due to success in their homeland, but good luck getting a foothold in the U.S. or Europe, especially with China tariffs at the forefront of elections on both this year.
It’s no surprise that all of these companies are heavily shorted; there’s a difference between contrarian potential and simply bad stocks. Options traders, though, don’t seem to get the message, with every single name boasting a 50-day call/put volume ratio over 1.0 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Given the amount of short interest tied up in all five equities, it’s possible some of these short sellers could be using calls to hedge against any unexpected upside.
It’s notable that Tesla, for all its perceived glitz and glamor, isn’t really covering itself in glory either — it’s one of the worst stocks on the S&P 500 in 2024 but has none of the pent-up short squeeze potential its smaller sector peers have. With little contrarian opportunity and expensive premiums – TSLA’s Schaeffer’s Volatility Index (SVI) of 47% sits in the middling 32nd percentile – Tesla stock doesn’t look very enticing to options traders at the moment. Yet despite the technical struggles, Tesla the company still dominates the U.S. market for EVs, in part because the Model Y is much more affordable than its counterparts. And as long as they’re an industry leader in a flailing sector, Tesla’s struggles are just intriguing entry points.
Where can an investor turn to, beyond Tesla, if they’re bullish on the EV space? Maybe the better question is if you should enter the space at all right now. While EV purchases increased year-over-year, the amount still only accounts for 10% of all car purchases, per Kelley Blue Book. Per the Financial Times, only five new electric models costing less than $40,000 have come on to the US market in 2024. The U.S. and European Union (EU) slapping tariffs on Chinese EV’s, and lithium-ion batteries further complicates matters. EV’s may be the future, but the demand isn’t there right now to accommodate any sector heavyweights outside of Tesla.
Per the table above, America’s big three — Ford Motor (F), General Motors (GM), and Stellantis (STLA) are all jockeying for silver within the EV sector with Hyundai and the German giants Mercedes and BMW. However, setbacks are everywhere — GM recently lowered its EV production targets, Ford’s EV sales are slowing, and Stellantis is shuffling production between China and Europe. Everyone is still chasing Tesla, so taking a flier on F, GM, or STLA based strictly on EV market share right now is risky, at best.
EV stocks being in rough shape isn’t some revolutionary, thought-provoking analysis. What an investor can do though, even with the sector in shambles, is know the signs to look for that EVs are cruising toward sunnier days. Monitor EV prices year-over-year, as well as used and rental prices, to see when the average starts to fall. Keep an eye out for any lithium battery developments that would streamline the supply chain. Overhauling the charging infrastructure is a key component of the Biden campaign. Any automakers building EV plants in the U.S. is a huge win. Once developments like these are announced, then it may be time to circle back to EV specialists, if they can make it through the next year.