With the fervor behind Tesla’s dramatic rise in 2020 and 2021, investors have been convinced that electric vehicles (EVs) are the next big thing. However, recent events have cast doubt on the industry’s trajectory, raising concerns about the sustainability of sky-high valuations and the challenges ahead for EV stocks.
EV Valuations Reach Unsustainable Levels
Following Tesla’s breakthrough into profitability, investors have assigned lofty valuations to EV stocks. For instance, Tesla currently boasts a price-to-earnings ratio of 71, in stark contrast to the single-digit earnings multiples of traditional automakers such as Ford Motor and General Motors.
Unprofitable start-ups, like Rivian Automotive and QuantumScape, have also witnessed inflated valuations, despite facing significant hurdles such as wide losses and the absence of revenue, indicative of a market seemingly detached from traditional valuation metrics.
Decrease in EV Demand Signals Industry Turbulence
Recent indicators have pointed to challenges in the EV industry’s rapid growth. Tesla’s repeated price reductions, followed by other EV makers, suggest a potential exhaustion of demand. Ford CEO Jim Farley has openly acknowledged that EVs are not yet competitive in terms of pricing compared to combustion vehicles, leading both Ford and GM to reevaluate their ambitious EV production targets.
Image source: Getty Images.
Hertz Holds a Tesla Fire Sale
Hertz’s recent announcement of plans to sell a significant portion of its EV fleet in the U.S. and invest the proceeds in traditional gas vehicles serves as a stark revelation. Initially hailed as a major supporter of the EV movement, Hertz’s decision signifies a step back in the EV revolution and a reality check for investors.
The anticipated shift away from EVs in Hertz’s fleet is particularly disheartening, as rental cars could have served as a convenient avenue for consumers to experience electric vehicles. The choice to divest further underscores challenges in convincing consumers to adopt EVs even in a rental setting.
Impact on the EV Sector in 2024
Hertz’s move to reduce its EV presence contributes to the downward pressure on EVs, further exacerbated by increased interest rates and a growing market for used EVs. Tesla’s implementation of price cuts in China signals a lack of substantial demand in the world’s largest EV market, reinforcing the narrative of slowing growth.
With public policy shifting away from supporting EV sales and a pragmatic reevaluation of the economic viability of electric vehicles by key industry players, the EV sector faces a challenging year ahead. As Hertz joins the ranks of major auto players scaling back on EVs, 2024 may prove to be another arduous period for a sector struggling with significant overvaluation.