Electric Vehicle Sector Faces Market Headwinds Amid Surge In Adoption

Written by:
Dan Irvine
February 18, 2024

In recent years, the electric vehicle market has experienced a remarkable surge in adoption, marking a significant shift in consumer preferences towards greener and more sustainable modes of transportation. This trend is particularly evident in the United States. Urban Science reports that EVs garnered a 7.8% market share across the U.S. in 2023, with some markets, like San Francisco, witnessing explosive growth to 34%.

In fact, in certain areas, the market share of EVs grew over 50% between 2022 and 2023, showcasing the sector's rapid expansion. However, this surge in adoption contrasts starkly with the plummeting stock prices of EV manufacturing companies over the past year, raising questions about the sector's financial health and future growth prospects.

Challenges Ahead For The EV Market

Despite the impressive growth in adoption rates, the EV industry faces significant headwinds that could impact its future trajectory. One of the primary challenges is the affordability of EVs.

The rolling back of government subsidies, which previously offered tax credits of up to $7,500 for EV purchasers, has made electric vehicles more expensive on average than their internal combustion counterparts by 5.5%, according to EV marketplace Find My Electric. In 2024, the number of models qualifying for the full tax credit will be down to just seven, reports TheStreet. Without these incentives, EV sales may slow from the breakneck pace of the last few years.

Technological challenges also pose a barrier to broader adoption. During a brutally cold stretch in northern parts of the U.S. in 2023, EVs were left abandoned at charging stations, unable to take on a charge. While advancements may eventually solve issues related to battery performance in extreme climates, these problems currently hinder adoption in certain regions.

Examining EV Company Valuations

Despite the downturn in stock prices, the valuations of EV companies remain relatively high. Broad comparisons make most EV stocks appear expensive despite being down 37% to 99.9% off their 52-week highs. Tesla TSLA-0.2%, Rivian, and Lucid, three of the top U.S. EV companies, have seen massive declines in their stock values but still boast a combined market cap of $623 billion, overshadowing the $472 billion combined market cap of traditional automakers Toyota, Stellantis, Ford, and GM.

Tesla's market cap alone stands at $600 billion, higher than the four major automakers combined. These valuations raise concerns about whether EV stocks may have further to fall, given their current valuation compared to traditional automakers.

The EV market's challenges, including affordability issues and technological hurdles, could slow down the sector's recent sales growth. The reduction in government subsidies may make EVs less attractive to cost-conscious consumers, while technological issues may deter adoption in certain climates. Additionally, despite their recent stock price declines, the high valuations of EV companies suggest that the market may be overly optimistic about the sector's growth prospects.

Outlook For The EV Sector

For investors considering entering the EV sector, the current market conditions present opportunities and risks. The surge in EV adoption indicates a strong consumer demand for electric vehicles, driven by environmental concerns and the desire for more efficient transportation. However, the industry's significant challenges, including affordability and technological obstacles, suggest that EV sales growth could slow in the coming years.

“The industry has seen a surge of new entrants as well as legacy automakers competing for a share of the EV market,” wrote Gabe Robleto, senior vice president of car dealership mergers and acquisitions firm Kerrigan Advisors, in an email. “While EV sales continue to increase, the rate of growth is slowing and EVs are stacking up on dealers’ lots, with inventory days-supply nearly double that of [internal combustion engine] vehicles.”

Investors should exercise caution and conduct thorough research before investing in EV stocks. The high valuations of many EV companies, despite their declining stock prices, suggest that these stocks may still be overvalued relative to their traditional counterparts. Investors should carefully consider the financial health and growth prospects of individual EV companies and look for those with solid fundamentals and a clear path to profitability.

Given the uncertain sales outlook for the EV sector a long-term investment strategy is most prudent. The volatility of EV manufactures stock prices makes short-term trading very risky as these immature companies try to find footing in a highly competitive segment of the auto market. The industry is likely to undergo significant changes in the coming years, with some companies potentially failing to survive in their current form. However, the companies who can navigate the economic and technological challenges may emerge as leaders in the new automotive landscape.

By carefully selecting individual stocks and adopting a long-term perspective, investors can position themselves to benefit from the continued growth of the EV market while minimizing their risk. With that said, the electric vehicle market is at a critical juncture, with surging adoption rates facing off against economic headwinds and technological challenges. Investors interested in the EV sector must navigate these complexities carefully, focusing on individual name selection and long-term growth prospects. As the industry continues to evolve, those who approach the EV market cautiously and diligently may find long-term value opportunities amidst the challenges.

About Kerrigan Advisors

Kerrigan Advisors is the premier sell-side advisor and thought partner to auto dealers nationwide. The firm advises the industry's leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Kerrigan Advisors has represented some of auto retail's largest transactions and advised more of the largest dealership groups in the US than any other buy/sell firm in the industry. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, the firm does not take listings, rather they develop a customized approach for each client to achieve their personal and financial goals. In addition to Kerrigan Advisors' sell-side advisory and capital raising services, the firm also provides a suite of consulting services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.

Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, which includes Kerrigan Advisors' signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments.—To download a preview of the report, click here.—The firm also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail.—To access The Kerrigan Index™, click here.—To read the—2023 Kerrigan OEM Survey, click here.—Kerrigan Advisors also is the co-author of NADA's Guide to Buying and Selling a Dealership.

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