Boosting a young company during a downturn or economic downturn is an uphill battle. That is even more true when the business in question is very capital intensive and operates in a sector that is still maturing. And after Wednesday’s interest rate decision by the Federal Open Market Committee, the Fed’s policymaking arm, the market appears to be assuming a hard landing or recession is looming.
That mindset sent unprofitable, growth-oriented electric vehicle stocks tumbling Thursday morning. Starting at 11 a.m. Eastern time, rivian automotive (RIVN -8.08%)down 7.4%, lucid group (LCD -9.82%) had been reduced by 9.7% and Nicholas (NKLA -6.45%) was reduced by 7.9%.
Some investors are taking the Federal Reserve’s decision to raise benchmark interest rates faster than expected as a sign that a recession is inevitable. At a minimum, it looks like short-term economic growth will be bumpy. Rivian and Lucid had already lowered their forecasts for 2022 vehicle production due to supply chain issues. And rising raw material costs are affecting all manufacturers, but are particularly problematic for companies that have just started commercial production and sales.
In the current macroeconomic environment, investor perspectives on these electric vehicle startups are beginning to shift from optimism and a focus on future potential to concern about their chances of survival. That helps explain why Rivian’s valuation is down 75% year to date. Similarly, Lucid and Nikola are down 58% and 47%, respectively, in 2022.
Rivian had a cash reserve of $17 billion as of March 31. CEO RJ Scaringe said in his annual letter to shareholders last week that the company has enough capital to meet its growth plans by 2025. That includes building a second $5 billion manufacturing plant and launching its next-generation vehicle platform R2. But if the economy slips into recession this year, it may not grow again by 2025.
That kind of economic scenario could be even worse for Lucid and Nikola. They both sell high-priced vehicles. Lucid’s luxury electric sedans are currently listed for up to $169,000. And while Nikola will try to tout the long-term savings its electric semi could provide to buyers, customers will still have to put down $300,000 up front to get one, before any tax credits or incentives.
While Lucid ended the first quarter with nearly $5.4 billion in cash on its balance sheet, it is perhaps looking at the current environment in a new light. That was evident on Wednesday when she announced that she had opened a new $1 billion revolving line of credit. She acknowledged that she already expects her cash to be spent next year. Therefore, you may need the new line of credit if product sales are not growing rapidly.
Investors are taking the hint and writing off these names and others they bought based on long-term high-growth projections.