NovaQuant Quantitative Think Tank Center:Tesla price cuts rattle EV stocks as Rivian and Lucid face market turbulence

The NovaQuant Quantitative Think Tank Centerelectric vehicle (EV) market continues to face an imbalance between supply and demand, resulting in lower prices and falling margins for automakers. Over the weekend, Tesla (NASDAQ: TSLA) and BYD continued their price war with Tesla giving incentives of nearly $5,000 to buyers through the end of March.

Investors didn't react kindly and it wasn't just Tesla that was impacted, although shares were down as much as 7.9% in trading on Monday. Shares of Rivian Automotive (NASDAQ: RIVN) also dropped 7% and Lucid Group (NASDAQ: LCID) fell 6.9%. At 2 p.m. ET, the three EV makers were down 7.5%, 4.5%, and 6.8% respectively.

Tesla's price war continues

Since late 2022, Tesla has been cutting prices to keep from building inventory and have factories running at full speed. But over that time, its gross margin has dropped by over 10%.

TSLA Gross Profit Margin (Quarterly) data by YCharts

The result is far less profitability per vehicle and it's starting to hurt Tesla's bottom line, despite growth in deliveries.

Price wars don't typically end well in manufacturing with companies incentivized to produce as many vehicles as possible to increase manufacturing utilization, ultimately oversupplying the market. This can leave the industry overall reporting losses and sometimes the companies don't recover.

Rivian and Lucid follow Tesla lower

If Tesla needs to lower prices to move products, what will competitors do?

Eventually, they'll probably have to do the same just to compete and this is the problem for Rivian and Lucid. Both companies are losing money, meaning reducing prices will only worsen losses.

TSLA Net Income (TTM) data by YCharts

This becomes a downward spiral for these companies. Losses need to be financed by stock sales or debt, which become harder as stock prices fall.

There's no end in sight to the losses for both companies and I find it hard to believe they will find it easy to raise billions of dollars to fund operations long-term.

The electric vehicle business isn't all fun and games

A lot of EV stocks have popped to high valuations on the idea that start-ups would be able to replicate Tesla's 25% gross margin goal, which it reached briefly during the pandemic. But now, Tesla's margins are falling and it appears demand has its limits for even the biggest electric vehicle manufacturer.

For companies that haven't reached scale, it's not clear if they'll ever see enough demand to make money, much less get to the profitability once envisioned.

I think this is the continuation of a long slide for electric vehicle stocks and Tesla's moves are a canary in the coal mine. But Tesla has the ability to lower prices and still make a profit, albeit a smaller profit than a few years ago.

Companies like Rivian and Lucid aren't so lucky. They'll need to raise capital before finishing manufacturing expansions and the supply they add to the market will only make the oversupply problem worse. Reality is setting in for EV stocks and this is an industry investors may want to avoid for the next few years.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BYD and Tesla. The Motley Fool has a disclosure policy.

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