As the wheels of the electric vehicle (EV) industry continue to spin at breakneck speed, many analysts and investors have been caught up in the electrifying whirlwind of optimism.
But is the industry truly driving towards a sustainable future, or is it merely coasting on the momentum of passing hype? Beneath the surface-level excitement, underlying challenges and potential roadblocks might slow the EV revolution.
Critically, cash flow and operational struggles are hallmarks of struggling EV stocks. While Tesla (NASDAQ:TSLA) overcame many of these and cemented its dominant position, others aren’t as lucky. Still, despite its success, some consider Tesla overvalued.
Common ratios bear that thesis out, as Tesla’s high price-to-earnings ratio indicates an overpriced stock. However, investors should be wary of going short on Tesla, as many got burned by the strategy. In fact, short-sellers are down more than $6 billion in their best against Musk.
To that end, those looking to short overvalued EV stocks should look to these losers instead. Or, if you’re unlucky enough to hold them in your portfolio, sell now.
Fisker (NYSE:FSR) is facing the downstream effects of its overvaluation in a constrained economy, which may soon bring this EV stock to its knees. At the beginning of the month, the automaker reported massive production cuts.
Fisker already struggling to push its product to market. Previously projecting a 2023 net production of just 36,000, the revision pins the final count around 20,000. That’s more than one-third lower than its paltry past projection and doesn’t bode well for the cash-hungry company.
In the August 4th interview linked above, CEO Henrik Fisker said he expects that “[at the] end of August, we believe this problem should be solved.” Well, we’re at the end of August this week, and there hasn’t yet been substantial reporting that indicates Fisker’s fixed its production problem.
Notably, the company’s core focus is on the luxury car segment, similar to Tesla’s successful game plan. But the move isn’t panning out as well as it did for Tesla, as Fisker missed its Ocean SUV target by a wide margin (1,022 sold in Q2 compared to 1,700 projected).
Even as institutional investors increase their stake in EV stock Rivian (NASDAQ:RIVN), the company remains overvalued. This EV stock may have better prospects than other, shakier competitors, but that doesn’t negate its financial instability.
The company is bleeding cash, with a $6 billion profit loss in 2022. Rivian maintains that unimpressive trajectory today, as its most recent quarterly report marked a further $1,285M loss. To be fair, that’s better than the previous period, but is still insufficient to bring Rivian into the EV stock major leagues.
Critically, despite a $10 million cash reserve, the company’s burn rate outpaces its holdings. In the same quarter, Rivian reported negative free cash flow. With expenses like R&D, capital expenditure, and similar cash outflows, Rivian may soon exhaust its slim and rapidly declining piggy bank.
Nikola (NASDAQ:NKLA) is somehow still a player in the EV space despite its founder’s 2022 fraud conviction. Still, despite its bottom-barrel pricing, the stock remains overvalued. And institutional investors agree. This week, investors bought a whopping 225,139 put options on the stock, a decidedly bearish sentiment.
Even insiders are running for the exit despite it’s near-penny stock status. CFO Anastasia Pasterick sold a chunk of her holdings at the beginning of the month. Likewise, Director Michael Lohscheller sold nearly 10% of his holdings for a measly $135,000.
The company is hemorrhaging cash with little prospect of operational success, leading the manufacturer to resort to suboptimal financial engineering. In a quick cash move, Nikola sold $325 million in convertible bonds. While it represents a fast cash infusion, the convertible bonds pay a 5% coupon. Yet, this will further hamper Nikola’s future cash flow as it pays a fairly high debt cost over time. And, if buyers convert those bonds to equity, it will substantially dilute existing shareholders.
Ultimately, Nikola is on thin ice, and any remaining bag holders shouldn’t hope for a reversal.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.