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.

The Apple growth and profit machine is wavering, and the boost from price increases might not be enough to keep it going at historic rates. That dials up the pressure on Apple’s new chief executive, John Ternus.

The company saved the bad news for its earnings call, an hour after it posted its results for the September quarter, projecting that for the current quarter its high-margin services business will continue to slow and that its widely watched gross profit margin will continue to fall.

Apple AAPL -1.83%decrease; down pointing triangle shares had been flat in post-close trading but declined as much as 4% after the company made the projections, which fell short of Wall Street estimates.

The impact of high memory costs are weighing even more heavily on the company, Ternus and Apple Chief Financial Officer Kevan Parekh said on the company’s earnings call. Apple has stockpiled cheaper components purchased earlier, but those inventories are dwindling.

When Ternus took over as Apple’s third chief executive of the past 29 years on Sept. 1, he inherited sky-high expectations. The men he followed were among the most successful company leaders in American business history. Steve Jobs revolutionized consumer devices multiple times. Tim Cook expanded Jobs’s creation to spectacular heights.

The expectations are reflected in Apple’s huge valuation. Oppenheimer analyst Martin Yang noted that Apple stock trades at 36 times next year’s expected earnings, a premium to the overall market, even though its earnings are only expected to grow 1%, which is slower than its tech peers.

“We see insufficient upside to justify the premium,” Yang wrote in an investor note, adding that Apple needs to boost iPhone sales growth and turn around its slowing services business to make him more bullish.

Investors have bid up Apple shares because it has been a port in the AI storm—a reliable and capital-efficient business that stands apart from rivals which are spending hundreds of billions of dollars racing to the AI frontier.

While others invest in data centers, Apple has been pouring its own cash into buybacks and dividends. But that safety may be challenged if Ternus can’t speed up Apple’s innovation engine.

Apple’s lagging performance in AI was evident when its new “Siri AI” chatbot arrived this past quarter. Its long-maligned assistant was already stale the day it arrived, surpassed by agents such as Instinct and Muse that can complete multistep tasks for consumers, while Siri still sets kitchen timers.

Apple needs to give people reasons to buy its devices as they get more expensive. The company raised prices across the board last quarter to help offset higher costs. Without compelling new features, a big question is whether consumers will slow the frequency of iPhone upgrades.

The new iPhone Duo appears to be a bright spot. Consumers are scooping up the $1,999 foldable smartphone despite mixed reviews—so many that Apple can’t keep up with demand. Shipping dates jumped out to January soon after the device went on sale, a disappointment for the normally reliable Apple supply chain.

Apple said its revenue grew 12% in the September quarter, slightly ahead of Wall Street’s expectations. Its widely tracked gross profit margin, at 47.9%, also came in just ahead of analyst estimates.

Apple will need to find new growth avenues because a reliable engine during the Cook era—the services business—is slowing. Courts and regulators worldwide have limited Apple’s ability to charge developers big fees to distribute apps through its App Store, the biggest component of the company’s services segment.

One of its most lucrative App Store fee generators has been the ChatGPT app from OpenAI. Around the time Apple accused OpenAI of trade-secret theft this past summer, OpenAI began redirecting potential subscribers to pay via its website instead of the App Store, skirting Apple’s tollbooth.

Apple’s valuation has bumped up against a ceiling in recent weeks. Six times it traded above a $5 trillion market capitalization intraday before finally closing above the threshold, which it has already fallen back below.

News Corp, owner of The Wall Street Journal, has a commercial agreement to supply news through Apple services.

4 Factors That Are Popping the EV Stock Bubble

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

Apple’s growth engine is showing signs of slowing, as rising costs, weaker services growth and AI competition challenge its profitability. With John Ternus taking the helm, the pressure is on to reignite innovation and sustain investor confidence.