After witnessing Tesla‘s (NASDAQ: TSLA) meteoric rise in 2020 and 2021, investors seemed firmly convinced of one prevailing notion: Electric vehicles (EVs) are the undeniable future, holding the promise of significant rewards for those who emerge victoriously in this high-stakes competition.
Following its pivotal moment of turning a profit, Tesla’s stock was awarded staggeringly high valuations. Currently, Tesla trades at a price-to-earnings ratio of 71, a sharp contrast to the single-digit earnings multiples of legacy automakers such as Ford Motor and General Motors.
On the heels of Tesla’s success, unprofitable start-ups have seen even more inflation in their valuations. Notably, Rivian Automotive (NASDAQ: RIVN), went public with a staggering market capitalization well above $100 billion. Also, QuantumScape (NYSE: QS), the development-stage producer of solid-state batteries, boasts a market cap close to $4 billion despite having no revenue.
Over the past year, indications have surfaced suggesting that the rapid growth of the EV industry is encountering obstacles. Tesla has repeatedly reduced its vehicle prices, prompting several other EV makers to do the same. This trend signals a depletion of demand in the industry. Electric cars are no longer as “hot” as they once were, and the quest for new customers is becoming increasingly arduous with early adopters already having made their purchases.
Ford CEO Jim Farley, acknowledging this challenge, remarked that EVs simply aren’t price-competitive with combustion vehicles. Both Ford and GM have revised their ambitious EV production targets, citing the presently untenable economics for electric vehicles.
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Hertz Takes a U-Turn on Tesla
However, a recent announcement from Hertz (NASDAQ: HTZ) hints at even tougher challenges looming for EV demand in 2024.
Few companies embraced the EV trend as fervently as Hertz did. The rental car giant made waves in 2021 with its plan to purchase 100,000 vehicles from Tesla, a move that helped propel Tesla’s market cap to over $1 trillion and caused a double-digit surge in Hertz stock.
However, just over two years later, Hertz confessed that the decision was a blunder. It now intends to offload around 20,000 EVs in the U.S. and utilize the proceeds to acquire traditional gasoline vehicles. Hertz cited additional costs associated with EV maintenance and repairs, and indicated in a filing that demand was insufficient to meet supply.
This move signifies a notable setback in the EV revolution and serves as a somber reality check for EV investors, indicating that technological progress is not supposed to regress.
Additionally, this development is disappointing as rental cars seem like an accessible entry point for consumers to experience electric vehicles. Unlike gas-powered vehicles, rental car companies are able to recharge EVs upon return, sparing renters the hassle of locating a gas station upon drop-off.
Implications for EVs in 2024
Hertz’s fire sale is the latest indication that downward pressure on EVs will persist in 2024. With elevated interest rates and an expanding pool of used EVs competing with new models and lower-cost foreign-made EVs, the landscape remains challenging. Furthermore, Tesla’s recent price cuts in China point to sluggish demand in the world’s largest EV market.
The lack of interest from car renters in EVs appears to mirror the deceleration in growth of EVs among car buyers.
At this juncture, the EV industry seems to require a catalyst to reignite demand, such as a breakthrough in solid-state batteries. However, public policy is shifting away from supporting EV sales. For instance, the $7,500 EV tax credit in the U.S. now applies to fewer electric vehicles due to import restrictions.
With Hertz joining the ranks of major auto players that are retracting from electric vehicles, 2024 is shaping up to be another challenging year for a sector that still appears significantly overvalued.
