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Electric vehicle (EV) stocks were heading lower Friday, and there was a good explanation for it. At the lows of the session, China-based Nio (NIO -0.09%), luxury electric sedan maker Lucid Group (LCID -1.93%), and specialty delivery vehicle start-up Canoo (GOEV 3.08%) had each dropped by between 4% and 7%. As of 1:35 p.m. ET, all three stocks had recovered somewhat, but Nio was still down 1.7% and Lucid was lower by 3.1%. Canoo, however, was up by 1.5%.
It wasn’t any news from or about these companies that had investors selling their shares, though. It was what many considered bad news from EV leader Tesla (TSLA -0.94%), which announced it was expanding its vehicle price cuts beyond China to include EVs sold in Europe and the U.S.
On the surface, that could be great news for its rivals, especially for Nio and Lucid. Nio is a growing competitor in the critical Chinese market, and Lucid’s luxury Air sedans are direct competition for Tesla’s Model S in the U.S. In fact, since Tesla announced it was slashing prices in China earlier this month, Nio’s share price has gained more than 10%.
But Tesla’s moves on pricing can also be viewed a different way.
Image source: Lucid Group.
Tesla is extremely profitable and is generating more cash flow than it needs to keep expanding. It also has strong profit margins compared to traditional automakers, in part because it doesn’t use a dealer network or advertise. So while Tesla likely doesn’t want to cut prices, doing so could be a strategic move to strengthen its lead over the growing competition.
Tesla is now selling its Model 3 in China for less than Nio’s comparable offering: Nio’s ET5 mid-size sedan sells for over $45,000, while the Model 3 is now priced at the equivalent of about $33,000. If those price reductions are a sign that consumers are shying away from more expensive vehicles, that would be particularly bad news for Lucid. Canoo hasn’t begun sales and isn’t in the same market, so it won’t experience any near-term impacts from Tesla’s move.
Lucid delivered almost 1,400 vehicles in the third quarter at an average price of nearly $140,000. In the fourth quarter, it produced almost 3,500 EVs, but only delivered about 55% of them. That signals that the company is still experiencing the logistics bottlenecks in terms of shipping its vehicles that it acknowledged in its third-quarter report, an issue that is adding to investors’ concerns.
Lucid will report its fourth-quarter results on Feb. 22, at which time investors will find out more details about its production and delivery ramp-up. It will also disclose what customers are paying for each Lucid sedan. But Tesla’s moves to cut prices don’t bode well for what Lucid will report. If Lucid has to cut its prices too, or if its reservation numbers shrink due to economic conditions impacting the high-end EV market, it will hinder the company’s path to profitability. The same would go for Nio if it has to cut prices to better compete with Tesla. That scenario would explain why those EV companies’ shares were falling Friday.
Howard Smith has positions in Lucid Group and Nio. The Motley Fool has positions in and recommends Nio. The Motley Fool has a disclosure policy.
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