4 Factors That Are Popping the EV Stock Bubble

Shares fell hard across the sector on Wednesday as concern about inflation joined the list of worries dragging on the shares. Stock in Tesla (ticker: TSLA), the leader of the EV pack, dropped 4.4% Wednesday, closing below $600 a share for the first time since early March. Shares closed near the low of the day.

The average drop among the EV stocks Barron’s tracks was about 3%. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite dropped 2.1%, 2% and 2.7%, respectively.

Behind all those declines was news early in the day that consumer prices increased 4.2% year over year in April, far higher than the Federal Reserve’s 2% target. In April 2020, of course, things were falling apart, sending prices lower, amid Covid-19 lockdowns, so the gain was relative to a low base. But the March to April pickup in prices, excluding food and energy, was 0.9%. That rate equals full-year inflation of more than 11%.

Inflation that high is like a parasite, eating into savings and sucking energy out of the economy. It also tends to hurt stock valuations, especially those of expensive growth companies that are expected to generate most of their cash flows far in the future. Higher inflation means higher bond yields, which reduce the current value of future cash flows, partly because higher rates give investors options to earn more interest on their money right now.

Wednesday’s inflation-fueled declines are just the tip of the iceberg, though, for EV companies. Tesla stock is down about 34% from its January 52-week high of more than $900 a share. The average drop from 52-week highs for the rest of the EV names is about 70%. Investors just don’t have the appetite for more speculative, higher-growth stocks in the current environment.

Stock in Churchill Capital Acquisition Corp. IV (CCIV), the SPAC merging with Lucid Motors, is down about 73% from its 52-week high. Hyliion (HYLN) shares are down about 86%. And the Chinese EV makers NIO (NIO), XPeng (XPEV) and Li Auto (LI) have fallen an average of about 45% from their 52-week highs.

Inflation is just the latest problem for the stocks. More competition in the EV business, with traditional auto makers pouring billions into developing vehicles, is one problem. At the same time, the global shortage of semiconductors is constraining automotive production around the globe, making it hard for EV makers to benefit from red-hot demand for cars and rising gasoline price.

What is more, many of the new EV companies became public by merging with special-purpose acquisition companies. Many SPAC stocks, not just the EV-related ones, are struggling. The Defiance Next Gen SPAC Derived ETF (SPAK) is down 34% from its February 52-week high.

A dozen EV-SPAC companies Barron’s tracks are now down 15% over the past year on average. Only five remain above their SPAC merger price of $10 a share: Lucid, Fisker (FSR), Arrival (ARVL), QuantumScape (QS), and Nikola (NKLA).

Investors might believe that means those are the long-term winners among the EV SPAC stocks. But it is also possible their higher prices mean there is still further to fall.

Apple AAPL 0.50%increase; became the second company to close above the $5 trillion mark on Wednesday, capping the Tim Cook era, and posing an implicit challenge to new Chief Executive John Ternus.

The iPhone-maker’s shares closed at a record, just enough to push the company’s market capitalization into territory that only chip colossus Nvidia occupies. Apple’s market value has surpassed $5 trillion six times previously during intraday trading, but it had never closed above that level, which it squeaked past on Wednesday, ending the day at $5.005 trillion according to Dow Jones Market Data.

Cook’s act will be tough to follow. During his 15-year tenure as CEO, which ended Aug. 31, Apple’s market capitalization multiplied by a factor of 13. He nearly quadrupled the number of iPhones sold annually. He grew its highly profitable services business from $10 billion annually to more than $100 billion. He launched the Apple Watch and AirPods, which together generate more than $30 billion a year. He poured Apple’s cash into more than $1 trillion worth of share buybacks and dividends.

Today, Apple shares trade at a premium compared with the overall S&P 500 even though the company’s revenue growth rate is slower than the index’s average. That is because the company’s shares are viewed as safe, and its business predictable, say analysts.

A key to Apple’s success under Cook is how it has limited capital spending, juicing the company’s returns for investors and greatly reducing the risks of its business. That has never been more apparent than during the AI build-out, when big tech rivals have rushed to spend gargantuan sums on data centers while Apple has focused on its core businesses making devices and selling high-margin services for them.

Apple investors are so confident in its business that they have driven up its shares despite big cost increases that threaten profit margins. The cost of memory and storage chips inside iPhones, Macs and iPads has skyrocketed as demand for those chips from data centers has led to shortages. Apple has responded by raising prices across its device lineup, including for older model iPhones that would typically get a price cut.

In theory, such a move could hurt Apple since iPhone buyers might wait longer to upgrade their devices. Yet since the first wave of price increases Apple shares have jumped 25%.

In part, that is because investors think Apple device buyers will pay the higher prices, enabling Apple to generate as much or more in total profits even if margins are down, said Bank of America analyst Wamsi Mohan. He added that Apple’s new foldable iPhone Duo is likely to be popular and that the new Siri AI will prompt iPhone upgrades.

AI has long been viewed as Apple’s Achilles’ heel. The company failed in its efforts to build its own frontier model, and it also allowed its Siri assistant to fall far behind rivals. ChatGPT revolutionized what smartphone users expect from chatbots.

Apple hopes to turn a corner with the new Siri AI. Built with Google’s help, Apple’s redesigned chatbot was released this fall. It still lags behind rival AI systems in key respects, though it has the advantage of being built directly into the device that many people already use, their iPhone. Apple also has access to more personal data, which could theoretically be used for compelling AI features, though new AI agents show the technology is advancing faster than Apple’s ability to keep up.

Tech rivals know how important it is to control the devices that people use to deliver their services. Perhaps most threatening to Apple, OpenAI is planning a family of AI-powered devices. It has poached hundreds of Apple employees to drive its device strategy. Apple responded in July by suing OpenAI, alleging it stole Apple trade secrets.

OpenAI has said it is “not aware of any evidence that this complaint has merit” and alleged in a new legal filing Wednesday that Apple poached one of its own employees who took confidential files with him. Apple said in response that it had found no evidence supporting the new allegation.

AI could be the battleground where Ternus makes his mark, either ushering in a new era of innovation and growth for Apple or finally losing its status as the company that has defined how people interact with computers.

4 Factors That Are Popping the EV Stock Bubble

Electric-vehicle investors are going through a brutal stretch after an epic year.

Apple closed above a $5 trillion market valuation for the first time, capping Tim Cook’s 15-year tenure and setting a high bar for incoming CEO John Ternus, as the company faces growing pressure to strengthen its AI capabilities and sustain growth.