Why Tesla, Rivian and QuantumScape came together today

Shares of electric vehicle (EV) stocks. adze (NASDAQ:TSLA), Rivian (NASDAQ: RIVN)and QuantumScape (NYSE: QS) all were up 4.3%, 8.8% and 4.3%, respectively, as of 2:28 PM ET on Friday.

There was no company-specific news today, so the moves can probably be attributed to Federal Reserve Chairman Jay Powell’s upbeat speech today at the annual conference in Jackson Hole.

The prospect of a lower interest rate would be a huge boost for all stocks that have been hit by the rate hikes seen over the past two years, and EV stocks have been among the hardest hit.

“The Time Has Come”

Powell made news this morning by declaring in his speech, “The time has come for politics to adjust.” This declarative statement was perhaps even more definitive than investors expected and indicated that the Fed would certainly cut interest rates in September, perhaps by as much as 50 basis points. In July, the Fed left the federal funds rate unchanged at its cycle highs, even before a weak jobs report, more weak inflation readings and a downward revision to job growth were revealed more recently.

This has led to concerns that the Fed has been slow to cut rates, which could lead to a recession. However, Powell sounded fairly confident in his speech that the data points more to a “soft landing,” or lower inflation and interest rates without severe job losses, thanks to the central bank maintaining inflationary expectations on long term anchored. Powell said: “An important takeaway from recent experience is that anchored inflationary expectations, bolstered by vigorous central bank action, can facilitate disinflation without the need for slack (in the labor market).

Electric vehicle stocks have soared, and it’s not hard to see why. Electric vehicle stocks have been hurt in recent years by high interest rates in two ways.

First of all, cars are a big purchase and are usually financed with auto loans. In addition, electric vehicles are generally more expensive than vehicles with an internal combustion engine, which makes the purchase even more daunting. In response to higher rates and falling demand, EV companies have cut prices to move volumes, squeezing margins. You can see how even industry leader Tesla’s margins have gone in the wrong direction:

The second way high interest rates affect electric vehicle companies is by increasing the cost of capital and hurdle rates. This is especially bad for low-profit or loss-making companies like Rivian and QuantumScape, and even multi-cap stocks like Tesla.

The story continues

Since companies with high multiples or losses theoretically have all of their profits in the future, higher interest rates lower the present value of these future earnings streams. In addition, loss-making companies may need to raise more capital, and higher interest rates make this more expensive, which also affects a company’s intrinsic value.

So a drop in interest rates without a recession would be a huge relief for EV stocks on these two big fronts.

But lower rates are not a panacea

While lower tariffs would certainly help a lot, keep in mind that unlike other technologies, auto manufacturing is generally a capital-intensive, cyclical and competitive, low-margin business. That’s why mature auto companies tend to trade at low P/E multiples.

Of course, each of these companies seems to be on top today. Tesla has long been known as a technology leader, but it’s making a big bet on robotaxis that may or may not pay off, and competition is creeping up on its leader in EV technology.

Rivian is certainly a formidable company and has secured high-profile partnerships with the likes of Amazon and newer Volkswagen. However, Rivian still had an operating loss of $1.4 billion in the last quarter alone, so the path to profits certainly remains a question.

Meanwhile, QuantumScape isn’t just unprofitable, it’s actually preempted as it works to commercialize its solid-state battery technology. While solid-state batteries could revolutionize the electric vehicle and automotive industries with their increased efficiency over lithium-ion batteries, the company is also losing money, with just a $134 million operating loss in the last quarter alone and under $1 billion in cash remaining on the balance sheet. .

Interestingly, QuantumScape recently struck a deal with Volkswagen that will inject more money through a technology license, but will also cede QuantumScape Volkswagen’s intellectual property in the future. Both VW deals should help Rivian and QuantumScape’s dwindling cash positions, but it could also be that Volkswagen strikes a smart deal with both players to get its cutting-edge technology at a good price, due to difficult situations of both companies.

As you can see, interest rates are only one piece of the puzzle. The auto industry is being disrupted by EV and autonomous technologies with high uncertainty, so investing in the sector is not for the faint of heart — even with lower rates.

Should you invest $1,000 in Tesla right now?

Before buying Tesla stock, consider the following:

The Motley Fool Stock Advisor the analyst team has just identified what they think they are 10 best stocks for investors to buy now… and Tesla wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $758,227!*

Stock advisor provides investors with an easy-to-follow blueprint for success, including portfolio construction guidance, regular updates from analysts, and two new stock picks every month. The Stock advisor the service has more than four times return of the S&P 500 since 2002*.

See the 10 stocks »

*The stock advisor returns starting August 22, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Billy Duberstein and/or his clients have positions in Amazon. The Motley Fool has positions in and recommends Amazon, Tesla and Volkswagen Ag. The Motley Fool has a disclosure policy.

Why Tesla, Rivian and QuantumScape came together today was originally published by The Motley Fool