Source: Barron's
Author: Al Root (Al Root)

In 2024, electric vehicle stocks didn't start well, even for leading car companies$Tesla (TSLA.US)$Stock prices have also declined. There is still some optimism in the market, but weakening market demand and Chinese economic data are affecting investor sentiment.

The sharp decline in electric vehicle stocks has left investors confused, and perhaps all they can do is wait.

Based on this year's stock price trend, the “patience” argument is even more popular in the stock market. By the close of trading on January 17, Tesla,$BYD COMPANY (01211.HK)$,$Rivian Automotive (RIVN.US)$,$Lucid Group (LCID.US)$,$Fisker (FSR.US)$,$NIO Inc (NIO.US)$,$XPeng (XPEV.US)$und$Li Auto (LI.US)$The average share price has dropped 27%. synchronizing,$S&P 500 Index (.SPX.US)$Decreased by approximately 1%. For electric vehicle startups, the market value of about 130 billion US dollars has now evaporated.

The stock performance of traditional car manufacturers was also sluggish.$Ford Motor (F.US)$,$General Motors (GM.US)$,$Stellantis NV (STLA.US)$und$VOLKSWAGEN A G (VWAGY.US)$The stock price fell by an average of about 5%, and the market value evaporated by about 13 billion US dollars.

$Toyota Motor (TM.US)$It is one of the few car manufacturers that are bucking the trend. Since this year, the company's stock price has risen by about 10%, and the market value has increased by nearly 30 billion US dollars, partly due to the decline in electric vehicle sales. In 2023, the company sold about 100,000 pure electric vehicles and 3 million hybrid vehicles.

The reason electric vehicle stocks are weak is easy to explain. First, Tesla has lowered the price of electric cars in China and the US. Behind this is either weak demand, increased competition, or a combination of both. Lower prices also mean lower profit margins and profit expectations for the company.

Meanwhile, China's economic growth and total retail sales growth were weaker than expected. This situation has also spread to the stock market — from the beginning of the year to now,$SSE Composite Index (800146.HK)$It has dropped nearly 5%.

As an economic powerhouse, China's data is important for most stocks, and even more so for the automotive industry: China is the world's largest market for new cars (including electric vehicles). In 2023, about 70% of the 8.7 million pure electric vehicles (BEVs) sold in China, the US, and Europe came from China.

The sales volume of 8.7 million vehicles in the above three regions increased by about 33% year on year, and the growth rate is slowing down.

The Chinese market is an example: in 2023, sales of pure electric vehicles increased by about 20% year on year, while in 2022 the growth rate reached 84%. Citi analyst Jeff Chung (Jeff Chung) predicts a 16% growth rate in 2024.

Part of the reason for the slowdown in growth is the high penetration rate of existing cars, which limits the pace of technological development. Zhong predicts that in 2024, about 27% of all new cars sold in China will be pure electric vehicles and 16% will be plug-in hybrids — a total of 43% of new cars will be electric vehicles. In the US, hybrid and electric vehicles account for about 15% of total sales, with sales of approximately 1 million hybrid vehicles and 1.2 million pure electric vehicles (expected in 2024).

In a report released on January 17, Louis-Vincent Gave (Louis-Vincent Gave), CEO of stock market research firm Gavekal, wrote: “The (Chinese) electric vehicle market is rapidly saturated, and a fierce price war is imminent. This is not good news for participants or shareholders.”

Tesla's price cuts, the slowing growth rate of electric vehicles, and the weakening of China's economic growth are leading to intense competition in the electric vehicle market. These factors overshadow positive factors in the auto industry as a whole — for example, interest rate cuts are expected to ease the pressure on car payments later this year, and falling new car prices will help stimulate demand.

Adverse factors may cause car companies' 2024 performance guidelines to weaken (to be shown in the 2023 quarterly report).

UBS (UBS) automotive analyst Joseph Spak (Joseph Spak) said in the January 16 report that we see no reason for car companies to give aggressive 2024 guidance and are cautious about earnings for the fourth quarter of 2023.

Spark suggested that investors should wait for car companies' financial data to be released and give 2024 performance expectations. If the guidelines are good, investors can consider re-entering the market — be patient to avoid losses.

When the time was right, Spark was optimistic about GM stock and rated it as a “buy.” Peers also agreed, with about 70% of analysts giving GM shares a “buy” rating. Meanwhile, S&P 500 shares have an average buying rating of about 55%. Additionally, around 40% of analysts rated Tesla and Ford shares as a “buy.”

Among electric vehicle startups, Wall Street is bullish on Ideal Auto and Rivian — the two companies received “buy” ratings of around 90% and 65%, respectively. For established electric vehicle companies, Wall Street favors BYD over Tesla — around 94% of analysts rated BYD stock as a “buy.”

Investors should not forget Toyota. The hybrid technology leader's stock received a 67% analyst “buy” rating.

Editor/jayden