After Tesla‘s (TSLA -3.67%) dramatic rise in 2020 and 2021, investors seemed to be convinced of one thing. Electric vehicles (EVs) are the way of the future, and huge spoils will come to those who win the competition.
Since Tesla’s breakthrough moment when it generated its first profit, investors have awarded sky-high valuations to EV stocks. Tesla currently trades at a price-to-earnings ratio of 71, which compares to single-digit earnings multiples for legacy automakers like Ford Motor and General Motors.
Unprofitable start-ups have seen even more inflation in their valuations. Rivian Automative (RIVN -3.88%), for example, went public with a market capitalization well above $100 billion. While it’s fallen sharply since its debut at the end of 2021, it still has a market cap of $17 billion. And with wide losses — and profitability likely years away — the stock still seems priced for perfection. QuantumScape (QS -9.01%), meanwhile, the development-stage maker of solid-state batteries, has a market cap close to $4 billion and no revenue.
Over the last year, there have been signs that the EV industry‘s rapid growth is running into speed bumps. Tesla lowered its vehicle prices several times, and a number of other EV makers followed suit. That’s a sign that supply in the industry is starting to exhaust demand. Electric cars aren’t as “hot” as they once were, and with early adopters having already made their purchases, finding new customers is getting more difficult.
Ford CEO Jim Farley commented on this challenge directly, saying that EVs simply weren’t price-competitive with combustion vehicles, and both Ford and GM have stepped back from bold goals in EV production, saying that the economics aren’t tenable for electric vehicles right now.
Image source: Getty Images.
Hertz holds a Tesla fire sale
However, a recent announcement from Hertz (HTZ -6.82%) shows that EV demand could face even tougher challenges in 2024.
Few companies jumped on the EV bandwagon as hard as Hertz did. The rental car giant made waves in 2021 as it said it would buy 100,000 vehicles from Tesla, a move that helped propel Tesla’s market cap to over $1 trillion for the first time and sent Hertz stock up double digits as well.
However, just a little more than two years later, Hertz has admitted that the decision was a mistake. It now plans to sell about 20,000 EVs in the U.S. and will use some of that income to buy traditional gas vehicles. Hertz had complained about additional costs with EV maintenance, including repairs, and said in a filing that demand was not strong enough to meet supply.
The move signals a meaningful step back in the EV revolution and a sober reality check for EV investors as technological advances aren’t supposed to go in reverse.
It’s also disappointing, as rental cars seem like an easy entry point for consumers to test out the electrical vehicle experience, and unlike gas-powered vehicles, rental car companies can recharge the vehicles when renters return them. That also allows renters to avoid the hassle of finding a gas station near the drop-off location.
What it means for EVs in 2024
Hertz’s fire sale is the latest sign that downward pressure on EVs will continue in 2024. Interest rates remain elevated, and the pool of used EVs is increasing, competing with new models and lower-cost foreign-made EVs that continue to enter the market. Tesla, meanwhile, just announced another round of price cuts in China, signaling sluggish demand in the world’s biggest EV market.
The lack of interest from car renters in EVs also seems to be reflective of slowing growth for EVs among car buyers.
At this point, the EV industry seems to need a catalyst to reignite demand such as a breakthrough in solid-state batteries, but public policy is moving away from supporting EV sales. For example, the $7,500 EV tax credit in the U.S. now applies to fewer electric vehicles than it did last year due to import restrictions.
With Hertz becoming the latest major auto player to pull back on electric vehicles, 2024 is shaping up to be another rough year for a sector that still looks significantly overvalued.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
