By The bankruptcy of Lordstown Motors has served as a wake-up call for the electric vehicle (EV) industry. As competition from Tesla and traditional automakers intensifies, the path to success for EV start-ups seems more challenging than ever. However, amidst this turmoil, small-cap EV stocks have been defying expectations and thriving.
Lordstown Motors, known by its ticker symbol RIDEQ, filed for Chapter 11 bankruptcy on June 27. Surprisingly, since then, shares of micro-cap EV companies like Canoo (GOEV), Arrival (ARVL), Faraday Future Intelligent Electric (FFIE), Lion Electric (LEV), GreenPower Motor (GP), and Proterra (PTRA) have experienced an average increase of nearly 40%.
Even Arrival, the only company in this group to see a decline in its stock price, cannot dampen the overall upward trend. Lordstown Motors itself, now trading over the counter, has seen its stock rise by 21% since declaring bankruptcy. Meanwhile, established profitable players in the EV market, such as Tesla and China’s BYD (BYDDY), have witnessed more modest gains of 15% and 4% during the same period.
It is not just small-cap companies that are benefiting from this surge. Larger EV start-ups with market caps of over $10 billion, including Polestar Automotive (PSNY), Lucid Group (LCID), and Rivian Automotive (RIVN), are also experiencing an average increase of around 40%.
Fisker (FSR) and Nikola (NKLA) sit between these two groups in terms of market cap. Nonetheless, both companies have seen their stock prices rise. Fisker shares have seen a gain of approximately 34% since the Lordstown bankruptcy declaration, while Nikola’s stock has skyrocketed by almost 150%.
In conclusion, it seems that the unpredictable nature of the market is at play once again. Investors should remain cautious but also realize that short-term performance is not solely dependent on a company’s management decisions. EV start-ups, against all odds, are capitalizing on the current market environment and proving their resilience.
The Rise of EV Start-ups in the Market
Some recent market gains in the electric vehicle (EV) start-up sector can be attributed to company-specific news. For instance, Nikola recently announced the sale of 50 hydrogen fuel cell-powered trucks, which undoubtedly boosted investor confidence. Rivian also surpassed Wall Street estimates in vehicle production and deliveries during the second quarter, further driving up stock prices. However, Lucid’s production and sales have not fared as well.
Nevertheless, the primary reason behind these significant market gains is the overall market sentiment and a growing appetite for risk. Since Lordstown declared bankruptcy, the S&P 500 and Nasdaq Composite have experienced respective gains of about 3% and 5%. Additionally, the Roundhill Meme exchange-traded fund (MEME), which tracks meme-like trades, has seen a remarkable 17% increase over the same period.
Investing in these so-called “meme stocks” signifies a willingness to take on higher risks. One notable characteristic of meme stocks is their typically higher-than-average short interest. Short interest refers to the percentage of borrowed stock sold short by bearish investors compared to shares available for trading.
While the average short interest for S&P 500 stocks stands at less than 2%, it is north of 10% for the smallest EV start-up stocks, according to FactSet. Nikola stock, for instance, boasts a short interest of almost 25%. This high short interest can potentially lead to short squeezes, wherein investors rush to cover their bets as stock prices rise, causing prices to surge even higher. This phenomenon may explain why shares of EV start-ups are experiencing a surge in value.
When it comes to the fundamentals of EV start-up stocks, not much has changed compared to a month ago. All these companies still require capital to establish and expand their businesses, while simultaneously competing in an increasingly saturated EV market. In the second quarter of 2022, 11 EV models in the U.S. sold more than 5,000 units, up from six models in the same quarter last year.
While these factors may hold significance in the long run, they do not seem to heavily impact the market at present.
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