Personally, I’m not surprised by the poor performance in this area of the market. One of my stock market predictions for 2022 was that small EV stocks would underperform. Has the recent weakness across the EV sector provided a buying opportunity for me though? Let’s take a look.
What’s next for Rivian and Lucid?
While EV stocks like Rivian and Lucid have all bounced a little recently, I think downside risk remains.
For starters, valuations are still quite high, even after January’s falls. At present, the market capitalisations of these companies are $63bn and $46bn respectively. Meanwhile, the forward-looking price-to-sales ratios of these companies are 18 and 21. Given that both EV companies have only produced a small number of vehicles, I see these figures as very high. If they suffer from operational challenges (like semiconductor shortages), their share prices could take a big hit.
Secondly, both of these companies are generating big losses right now and aren’t expected to turn a profit for years. In 2022, analysts expect Rivian to post a net loss of $4.7bn and Lucid to post a net loss of $1.7bn. Recently, appetite towards the stocks of unprofitable companies has really deteriorated due to the fact that the US Federal Reserve is in a tightening cycle. I think sentiment towards these kinds of stocks could get worse before it gets better.
Look out for the short sellers
Finally, both of these EV stocks have very high levels of short interest right now, which indicates that hedge funds and other sophisticated investors are betting that their share prices will fall. At present, Rivian has short interest of around 23% while Lucid has short interest of around 20%. I tend to view a short interest figure of more than 5% as a red flag because it signals that a lot of short sellers are downbeat on the stock. And that’s not a good thing as short sellers tend to do their research.
Of course, short sellers don’t always get it right. However, they’ve certainly had success with small EV stocks in the last year. Nikola, Workhorse, and XL Fleet are just some of the EV stocks that have been targeted by them. All are down more than 70% over the last year.
Better stocks to buy
I’ll point out that both Rivian and Lucid are exciting companies that have excellent products. I expect these companies to generate strong sales growth over the next few years as EVs go mainstream. Both could potentially capture market share from industry leader Tesla.
However, to my mind, neither EV stock offers a favourable risk/reward proposition right now. So, they’re not on my ‘best stocks to buy’ list at present.