Why Tesla, Toyota and Indie Semiconductor came together today

Actions of automotive leaders adze (TSLA 7.20%) and Toyota engine (TM 4.28%)as well as self-centering semiconductor stock Indie Semiconductor (IND 3.32%) were up 7.3%, 4.3% and 3.5%, respectively, as of 2:14 PM ET on Thursday.

The main factor driving auto stocks higher today was the Federal Reserve’s 50 basis point cut in the federal funds rate late yesterday. Here’s why this news was so important for autos and why the sector is bullish today — especially electric vehicle (EV) stocks.

Cars are rate sensitive, especially electric vehicles

Auto stocks have been punished this year as high interest rates have depressed growth. A vehicle is a high-priced item, so many cars are financed. Hence the sensitivity to interest rates. Electric vehicle stocks have been particularly low as higher tariffs have made EVs — which are generally priced higher than their internal combustion engine (ICE) competitors — less affordable. Given that EV-focused auto companies entered this period with higher valuation multiples, it’s no surprise that many have declined over the past couple of years.

VEs also saw a downward shift in their medium-term growth expectations. It was recently reported that Toyota plans to cut electric vehicle production by 30% by 2026 from previous targets in favor of its hybrid vehicles and other low-carbon alternative technologies. Although Toyota will continue to increase its absolute production of electric vehicles until then, it is clearly seeing weaker growth for purely battery-powered electric vehicles than before.

Recent data has also been discouraging. August sales figures outside Europe showed a staggering 18.3% drop in car sales from last year, marked by a 44% drop in sales of electric vehicles, according to the European Automobile Manufacturers Association (ACEA). The same report showed that Tesla’s sales in Europe in August fell by 43.2%. Of course, Europe was the worst auto market this year as its economy lagged behind the US and others. But industry group Cox Automotive also predicted a tepid US market, forecasting growth of just 1.3% from 2023.

Image source: Getty Images.

So yesterday’s announcement by Federal Reserve Chairman Jay Powell of a 50 basis point rate cut, larger than the 25 basis point cut that many had expected, caused a big spike of these depressed auto-related stocks and cyclical stocks in general. . As long as the economy doesn’t go into recession, yesterday’s big cut and forecasts for more cuts signal that the recent period of high inflation may be coming to an end. With the market looking forward, auto stocks jumped on prospects for consumer relief and higher car sales.

In addition, rate cuts may help Indie Semiconductor in particular, which is currently unprofitable. Lower interest rates tend to boost the valuations of low- or no-profit growth stocks, given that most of their theoretical returns are in the future. But the more distant the profits and cash flows, the more the present value of those profits is reduced by higher interest rates.

While most of today’s movement in Tesla and other auto stocks was likely due to a larger rate cut, Tesla also received some slightly positive company-specific news. Rival General Motors announced that it will allow its electric vehicle customers to charge their vehicles at Tesla superchargers by developing and distributing adapters for its electric vehicles. While this change would likely open up more competition for future Tesla acquisitions, Tesla will also make money from increased charging revenue. Of course, tax revenue is usually meager compared to selling more vehicles.

Perspective

The automotive industry is known to be highly cyclical and, given the high prices of cars in general, is particularly price sensitive. And for electric vehicle or auto-related technology stocks, with lower returns today but high hopes for the future, they are three times sensitive to interest rates.

That’s why yesterday’s bigger rate cut was such a big deal for auto stocks, and especially those focused on electric vehicles or auto technology. For holders of these stocks, this high sensitivity to interest rates is something to consider when holding these stocks.