Electric car startups may collapse as fast as they are rising

Even Rivian, seen by many auto experts as the most promising Western electric car company, is not immune to the boom and bust cycle taking place in the electric car market. But experts say this is typical when new industries emerge.

Rivian’s stock is down 75% since its initial public offering last year. In November 2021, the Rivian was worth more than Ford and GM, but now it’s half that value. Its appeal as a counterweight to Tesla, prestigious investors and a 12-year backlog of production weren’t enough to shield its share price from the downturn that afflicted nearly all electric car companies.
In 2021, the Rivian will produce 1,015 vehicles, less than its target of 1,200. It has more than doubled its production pace since last year — 2,553 vehicles produced in the first three months of the year — but it’s still less than what is necessary to be profitable and justify Its high rating. The company is already planning to build a second plant in Georgia to complement its Illinois plant, where the current facility expects to produce 200,000 vehicles annually. Rivian, like many automakers, has also raised its prices amid inflation and shortages, but has apologized and retracted price increases on existing pre-orders after customers reacted.
The challenges have been even worse for other electric car companies that have gone public in recent years. Shares of Faraday Future, Lordstown Motors and Electric Last Mile Solutions have fallen more than 70% since their IPO via SPAC, all of which have faced a Securities and Exchange Commission investigation.
SPACs, which are popular with electric car companies, allow companies without meaningful revenue or proven products to go public without as much scrutiny as a traditional initial public offering.

The sharp drop in electric vehicle stock prices may be typical of booms and busts. New industries excite investors with the opportunity to ride a financial rocket into the stratosphere of wealth, but some companies going public may not otherwise be in less enthusiastic times. The 2000 dot com collapse is one of the most frequently cited examples.

Although no new public electric car company has been convicted of fraud so far, the fraud is actually a model for stock market bubbles, according to William Quinn, a lecturer at Britain’s Queen’s School of Management who studies stock market bubbles. He referred to the British bicycle bubble of 1890 when hundreds of new bicycle companies were listed on the stock market at excessive valuations. Almost everyone went bankrupt within a few years.

David Kirsch, a University of Maryland business professor and co-author of Bubbles and Breakdowns, said he expects some electric car startups to survive but many to fail. “Stories unravel,” Kirsch told CNN Business.

The fate of two electric car companies, Nikola and Lordstown Motors, appears to be heading for the worse in 2020 and 2021 respectively, after critical reports alleging misleading and inappropriate behavior from investment firm Hindenburg Research.

American electric car companies aren’t the only ones downgrading their ratings. Electric vehicle startups in China have also had success. Nio is down 49% this year, X-Peng is down 52% and BYD is down 17%. Even Tesla, the world’s most valuable automaker, was not immune; Its stock is down 27% this year.

Kirsch sees falling stock prices for companies wanting to rival Tesla as evidence of how difficult it can be to turn startups that inspire investors with a story into companies that prove themselves on paper with revenue and profits.

“Some of these companies are somehow exposed,” Kirsch said. “There is a saying, when the tide goes out, you see who isn’t wearing a bathing suit.”

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