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Why QuantumScape, Lucid Motors, and Nikola Rallied on Friday

Motley Fool - Fri Jul 7, 2023

What happened

Shares of QuantumScape(NYSE: QS), Lucid Motors(NASDAQ: LCID), and Nikola(NASDAQ: NKLA) rose Friday, ending the session up 1.9%, 5.2%, and 8.5%, respectively.

QuantumScape is a pre-revenue company innovating solid-state electric vehicle (EV) batteries that are supposed to be a big improvement over today's lithium-ion batteries. Lucid is a luxury EV and powertrain manufacturer, and Nikola is an early-stage electric and hydrogen-powered truck manufacturer.

What these companies all have in common is that as they invest in building the future of clean energy transportation, they are still losing hundreds of millions of dollars every quarter. That means they need demand to remain strong, and for capital markets to loosen in case they need to raise more funds.

There were positive indicators on both those fronts Friday.

So what

First, Rivian Automotive(NASDAQ: RIVN) was upgraded by a prominent Wall Street analyst Friday after the electric pickup truck manufacturer announced second-quarter deliveries earlier in July that were 60% higher than its first-quarter result.

The combination helped lift virtually all EV industry stocks, as strong demand for one brand suggests there could be strong demand for zero-emissions vehicles generally, which would be good news for QuantumScape, Lucid Motors, and Nikola. In addition, these businesses have been impeded by supply chain snarls that have also threatened to slow their production, but Rivian's deliveries appeared to show that pressure is easing as well.

However, the picture is more complicated. Each of these companies is burning cash and may need to raise more money. One of their peers, Lordstown Motors, filed for bankruptcy protection last month. Last quarter, QuantumScape had a $62.5 million adjusted EBITDA loss, Lucid had a $693.9 million loss, and Nikola had a $126.7 million loss.

QuantumScape and Lucid don't appear to be in dire need of new funds in the near term. QuantumScape still has nearly $1 billion in cash on the books, while Lucid received a $3 billion capital injection from Saudi Arabia's sovereign wealth fund at the end of May.

Nikola is in a less prosperous situation. It only had $121 million in cash and equivalents on the books at the end of the first quarter, and it's trying to obtain permission from shareholders to increase its share count, paving the way for it to raise cash via a secondary stock offering. However, it is getting pushback from Trevor Milton, its founder and largest shareholder, who urged shareholders to vote against the share increase at the beginning of the month.

Needless to say, each of these companies could benefit from lower interest rates, which would reduce the bond coupon rate they'd have to offer to sell debt. In addition, lower interest rates tend to boost equity prices, making selling stock more palatable and less dilutive to previous shareholders.

On Thursday, some market-watchers were concerned that the red-hot June employment report from data provider Automatic Data Processing, which showed that the U.S. added 497,000 private sector jobs during the month, would spur the Federal Reserve to keep hiking interest rates to quell inflation. In response, unprofitable growth stocks generally fell Thursday.

However, the official Bureau of Labor Statistics figures for June came out Friday and showed that only 209,000 jobs were added, which was below projections for 225,000. That lower figure could give the Fed a reason to forgo further hikes.

Thus, the weaker jobs report was viewed as good news for the unprofitable growth cohort of EV stocks.

Now what

The news Friday was undoubtedly good for these three companies, but each of them remains a high-risk bet for investors. Nikola could follow Lordstown into bankruptcy, and seems to be plagued by infighting among its large shareholders. Meanwhile, QuantumScape's technology is exciting, but it's unproven, especially in commercial manufacturing volumes.

Lucid is the least risky of the bunch, but it's also losing a lot of money as it ramps up production of its luxury EVs. Moreover, public shareholders will be subject to the whims of Saudi Arabia's sovereign wealth fund, which now owns more than 60.5% of the company.

Therefore, while each of these stocks has high potential upside, the level of risk means they are only appropriate holdings for investors with long time frames who can afford to lose a substantial portion (or all) of their investments in them.

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Billy Duberstein has no position in any of the stocks mentioned. His clients may own share of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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