Why EV Stocks Like Rivian and Nikola Got Thrown Into Reverse Today

What happened

The electric vehicle (EV) segment of the auto industry has had some fine days on the stock market in recent times, but Tuesday wasn’t necessarily one of them. On some disquieting news from a major peer, investors traded out of a clutch of EV titles.

Among the segment stocks getting dinged was pickup and SUV maker Rivan Automotive (RIVN -4.09%), which skidded to a more than 4% loss on the day, and truck specialist Nikola (NKLA -2.52%) with a nearly 3% slide. Storage solutions maker Freyr Battery (FREY -0.72%) did comparatively well with “only” a 0.7% decline. For comparison’s sake, the S&P 500 index fell by 0.2%.

So what

Early on Tuesday, influential Chinese EV company Nio announced that it is seeking to raise at least a cool $1 billion in financing. Specifically, it aims to float two series of convertible notes, one to come due in 2029 and the other the following year. 

Investors were hardly cheered by that news, and it’s easy to understand why. While Nio has shown some very encouraging growth and is an important player in a massive market, the Asian company is unprofitable and cash-flow negative, so $1 billion is a very big bandage to help heal its finances.

Convertible notes are so named because they begin life as debt securities; under certain terms and conditions, they can convert into stock. But that much debt and/or equity is either going to be hurtful to the balance sheet, at least a bit dilutive for existing stockholders, or both. 

Nio’s move illustrates an uncomfortable reality all EV and alt-fuel stock investors have to face sooner or later: A great many companies in the segment are persistently unprofitable and in need of funding. 

Rivian, despite its first-mover advantage with the R1T EV pickup, has a concerning streak of net losses behind it. Nikola’s bottom-line numbers have been far deeper in the red, while smaller fry Freyr flipped into the red (by over $25 million) on a year-over-year basis in its latest reported quarter.

Now what

Meanwhile, the U.S. EV segment is populated by a host of developers and manufacturers jostling for position in every conceivable niche. At the moment, it doesn’t seem as if Rivian, Nikola, Freyr, or a clutch of other peers are about to go to the well for a big bucket of financing…but given their loss-making ways, it’s not out of the realm of possibility, either.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio. The Motley Fool has a disclosure policy.

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