Shares of electric vehicle makers Tesla (TSLA 6.82%), Rivian (RIVN 5.32%), and Aehr Test Systems (AEHR 14.15%) rallied on Wednesday, up 5.2%, 4.7%, and 15.8%, respectively, as of 11:30 a.m. ET.
There wasn’t much company-specific news today, so the across-the-board rally likely had to do with today’s important inflation report.
CPI runs hot, but the important “core” CPI cools
Inflation is a critical factor in demand for autos, as a car is a large-ticket item that is often financed by customers. But interest rates have proven to be especially critical for electric vehicle stocks, given that EVs have up until this point been a bit more expensive, at least up front before maintenance, than traditional internal combustion cars.
In addition, EV stocks tend to be unprofitable or trade at high multiples. Interest rates tend to especially punish high-multiple stocks or unprofitable stocks, as higher rates depress the value of cash flows that are further out in the future, while also making financing a business more expensive.
Thus, today’s positive inflation report sparked a “risk-on” rally, including these EV-related stocks. Today, the December Consumer Price Index (CPI) was released.
While the overall CPI came in a bit hotter than expected, “core” CPI figures, stripping out volatile food and energy prices, actually cooled more than expected. The CPI came in at 2.9% year over year and 0.4% month over month, versus expectations of 2.8% and 0.3%, respectively. However, core CPI came in at 3.2% year over year and 0.2% month over month, below the 3.3% and 0.3% expected.
Cool inflation data is critical, as new fears of an inflation reacceleration came to the fore after the Federal Reserve’s December meeting and press conference. In that meeting, Fed chair Jay Powell and other officials worried that strong economic data and the Fed’s 100 basis points of rate cuts since September may prevent inflation from coming down as quickly as hoped. After that meeting, long-term Treasury rates rose, and expectations for more short-term interest rate cuts fell, suggesting higher interest rates for borrowers of autos.
So, today’s “core” numbers coming in cooler than expected generated relief from the fears over higher rates.
Image source: Getty Images.
Each stock may have also bounced harder, given that each had sold off recently. Tesla enjoyed a post-election pop, thanks to Elon Musk’s backing of President-elect Trump, but has since seen a pullback. That pullback was amplified when Tesla reported a miss on its fourth-quarter deliveries in early January. Furthermore, the deliveries implied Tesla would experience its first-ever annual sales decline in 2024.
Rivian actually beat its fourth-quarter delivery target and popped on that news early in the month, but has since retreated amid the concerns about interest rates. Moreover, Rivian was down double digits in 2024, and remains unprofitable as it attempts to get to scale, losing $1.44 billion in the third quarter 2024 alone.
Aehr Test Systems isn’t a vehicle manufacturer, but it does make chip testing equipment that is largely centered on silicon carbide chips that go into electric vehicles. Aehr actually reported earnings on Monday that disappointed investors, missing both revenue and earnings expectations, and the stock plunged more than 25%.
Aehr had actually been disclosing new orders from both AI accelerator clients and gallium nitride clients in recent months, highlighting its attempts at diversification. However, the downturn in EVs is still affecting the majority of its existing business. CEO Gayn Erickson noted that silicon carbide investment would remain difficult outside of China in 2025.
Have electric vehicle stocks bottomed?
It’s difficult to say whether today’s CPI report marks the end of the downturn for EV-related stocks, but it’s certainly a positive data point. It’s also unclear whether EV demand is totally dependent on interest rates. Early adoption of EVs seems to have slowed, but this could also be due to factors like range anxiety. It’s also possible the new administration may repeal the EV tax credit, which could also slow a recovery in EVs.
All in, EV stocks still make for risky bets, especially given their high multiples or unprofitable status. Investors may want to stick with the highest-quality and profitable players in the EV supply chain, which ranges from chips, to parts manufacturers, to OEMs like Tesla and Rivian, to chip testing equipment like Aehr.
Furthermore, investors need to keep track of not only interest rates, but technology innovation and government policy changes as well. It’s a difficult sector, but can also lead to big gains if EV adoption reaccelerates.
