EV Stocks NIO and Tesla Are Falling Again. Here's Why. - Barron's

A Tesla Model Y.
Brendon Thorne/Getty Images

High-flying electric-vehicle stocks are falling yet again. Recent declines have been jarring, leaving investors scrambling for answers. Nothing much, however, has changed in the industry. That doesn’t mean there isn’t a good reason for the declines. There is. It is just beyond the control of the companies.

Tesla (ticker: TSLA) stock is down almost 33% from its 52-week high and down about 23% over the past two weeks. American depositary receipts of Chinese EV makers NIO (NIO), XPeng (XPEV), and Li Auto (LI) are down about 42%, 52%, and 43% from their respective highs.

The reason is inflation. Or more specifically, fears of inflation. Higher inflation means higher interest rates. Higher interest rates are poison for richly valued, high-growth stocks that generate the bulk of their earnings in the future.

Future money is always discounted back at an interest rate because $100 five years from now is worth less than, say, $90 years today. The discount for future money is dependent on the interest rate. With low rates, the penalty for waiting is small. When rates rise, investors can earn a lot of interest on today’s money, making stable businesses that pay dividends a little more attractive, relatively speaking.

Gary Black, and Tesla bull, took to Twitter (TWTR) to explain what was going on.

The 10-year Treasury bond yield, a crude proxy for inflation expectations, is up to about 1.4% or 1.5%. But that’s only to levels prevailing before Covid-19 tanked the global economy. Black expects Tesla to bounce back when inflation fears subside and Treasury yields stabilize.

Black is a former Wall Street analyst with a long history as a professional money manager. Now he has more than 60,000 Twitter followers listening to him about stocks.

Black’s price target for Tesla stock is $960 a share. He dropped it slightly, and got out of the stock, shortly after Tesla announced a $1.5 billion bitcoin investment. He’s back in share now after the recent decline.

Barron’s hasn’t picked or panned Tesla stock in recent years. However, we panned in December the three Chinese EV stocks, not because we aren’t impressed by their technology, but because they were expensive. That article now, finally, seems prescient, particularly after Fed Chair Jerome Powell ‘s action. Thursday, he said the Fed wasn’t changing its current policy, spooking investors further.

This isn’t a victory lap, more like stumbling off a rollercoaster. At points since our article appeared in December, ADRs of the Chinese EV three were up anywhere from about 20% to 50%. Now all three are on average about 25% below prices prevailing when the story was published.

The ADRs are still expensive, but less so. The three Chinese ADRs have underperformed Tesla stock in recent days. ADRs of NIO, XPeng, and Li are all down about about 30% over the past two weeks.

Some of the recent declines were caused by February delivery figures. All three reported fewer deliveries in February than in January. That jarred investors in the ADRs. But all three were impacted by the Lunar New Year holiday, when business typically slows down in China.

Investors in the ADRs might not have realized the impact the Chinese holiday can have. And there isn’t a lot of history to rely on. These were the first February-delivery releases that both XPeng and Li reported as companies listed in the U.S.; the ADRs of both companies went public last summer.

If deliveries accelerate from February levels and eclipse January numbers, the Chinese ADRs should make up some of the recent underperformance relative to Tesla.

Growth investors will be pleased if that happens. Value investors will continue to struggle with EV valuations no matter what happens.

Tesla stock trades at roughly 13 times estimated 2021 sales. NIO and XPeng ADRs trade at about 12 times estimated sales, while Li Auto ADRs trade at about 7 times. The Russell 1000 Growth Index, for comparison, trades at about 4.4 times estimated 2021 sales.

Tesla, NIO, XPeng, and Li shares are down 6% Thursday, on average. The S&P 500 and Dow Jones Industrial Average are both down about 1.5%.

Write to Al Root at allen.root@dowjones.com

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