Investing in electric vehicle (EV) start-ups has always carried above-average risk. That’s because no matter what fuel powers the car, making automobiles is a capital-intensive business. However, that didn’t stop many investors from pumping money into these start-ups in 2020 and 2021.
But the air came out of that bubble as investors realized it could be years before many of these start-ups would be profitable. Add in a global pandemic that is still affecting the supply chain, and you can understand why 2022 was a washout for many EV stocks.
And that risk is accelerating, even as many of these companies are beginning to deliver vehicles. Many of these EV stocks were buoyed by advance orders for their cars. But a 2022 survey revealed that many consumers were making reservations they never intended to fulfill. Usually, those consumers had one preferred brand and would take possession of only that one.
That’s why EV stocks continue to be under pressure, particularly those of EV start-ups. Specifically, there’s evidence of significant insider selling in EV stocks. As every investor knows, no signal is perfect. Nonetheless, since these insiders have access to more information than retail investors, their actions should carry some weight.
At some point, EVs may overtake internal combustion engine vehicles as the dominant form of transportation, but many things have to happen between now and then. Until that time, there will continue to be a risk when investing in EV start-ups. And for now, these are three stocks you may want to avoid.
Lucid Group (LCID)
Lucid Group (NASDAQ:LCID) has put investors on a wild ride in June. The company issued two bullish announcements that, when all is said and done, could add over $3.2 billion of cash to the company’s balance sheet.
That action may calm immediate fears about bankruptcy. However, $3 billion of that cash infusion is coming in the form of two capital offerings. The move signals shareholder dilution, which is not something that institutional or retail investors take lightly. It also may be why institutional selling outpaced buying in the last quarter at about a 3:1 clip.
Add to that the fact that Lucid is still a long way from profitability. In its most recent quarter, the company lost approximately $550,000 for every car it delivered.
And a bigger problem is it’s simply not delivering that many cars. The company fell short of its quarterly delivery target, delivering only 1,406 EVs. It is still forecasting the delivery of 10,000 units in 2023, but it’s fair for investors to wonder if that will happen. It’s important to note that, even with rebates, the company has some of the most expensive cars in the EV sector.
Lordstown Motors (RIDE)
In the last quarter, Lordstown Motors (NASDAQ:RIDE) issued a 1-for-25 reverse stock split. That’s enough to cause many investors to sell. But the company followed up that announcement with a bankruptcy filing in late June. Subsequently, the company saw many institutional investors walk away from RIDE stock.
Perhaps nothing illustrates the risk of investing in EV start-ups more than the risk of bankruptcy. Many investors realize that this singular risk may outweigh the benefits of finding the one or two EV start-ups that will beat the odds.
And while EVs may become the dominant form of transportation at some point in the future, there will likely be significant consolidation before that happens. In fact, Lordstown Chief Executive Officer (CEO) Edward Hightower believes Lordstown’s production facility and its Endurance truck could be valuable to an EV company looking to build cars in the United States.
Canoo (GOEV)
Canoo (NASDAQ:GOEV) is another example of the risk that comes from investing in EV start-ups. The company has an interesting concept. Its skateboard chassis is supposed to reimagine the interior and the utility of an EV.
That was good enough to generate some interest in GOEV stock at a time when hope and hype were the two largest investor expectations. Now that those expectations are turning to production and profit, Canoo is being left in the dust.
That’s not to say there’s no hope. The company has a backlog of orders, and it recently announced an expansion of scope with its partnership with the Department of Defense. But, to turn those orders into vehicles, the company has had to dilute its shares, and with the company continuing to burn cash, the dilution may not be over.
That seems to be the opinion of institutional investors who are starting to sell GOEV stock. And it’s important to note that the institutions only own about 25% of the company’s stock. That means retail investors like you are being asked to do a heavy lift. There are likely to be better options.
On the date of publication, Chris Markoch did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
