I often note that the ongoing downturn in the EV market could present a strong buying opportunity for aggressive investors. However, that sentiment doesn’t apply to all EV stocks. Not all EV companies are created equal, and some huge discrepancies make certain EV stocks worth steering clear of. The only position you’d want in these stocks is a short position, and even that might be risky, given the immense volatility of this space. You’ll almost always lose money investing in these stocks because these businesses are hemorrhaging cash and diluting shareholders to continue their unsustainable operations.
Now, I tend to have a high risk tolerance. But there are exceptions, and these three companies have bright red flags that even the most iron-stomached investors should heed. Let’s take a look at three EV stocks to avoid like the plague.
Lucid (LCID)
Lucid (NASDAQ:LCID) is a popular EV startup and is one that gives me great pause. This startup burns cash at an alarming rate, and ongoing dilution makes it nearly impossible to envision long-term gains owning this stock.
Analysts don’t expect Lucid to reach profitability until 2029. For a new entrant in a rapidly evolving space, that timeline is very long. Many competitors will burn far less cash over that span and bring competitive EVs to market faster. Additionally, Lucid’s 2024 production target of just 9,000 vehicles is microscopic in the grand scheme of things. More alarming is how much money Lucid loses on each car it sells. So, in theory, the more deliveries grow, the deeper the losses can get.
These losses are staggering, coming in at $653.8 million in Q4 2023 and $2.8 billion for the year. With around $4 billion in cash left, the clock is ticking for Lucid to ramp up its production and achieve break-even sooner. Unfortunately, demand is simply not robust enough for Lucid to wield pricing power and generate sustainable margins. Long-term fundamentals do not seem promising for Lucid investors, to say the least.
In short, Lucid appears nowhere close to justifying a $7 billion valuation. Its business model faces immense challenges, from strained demand to huge cash burn, before it can plausibly thrive. While some investors see value in severe pullbacks, I see a company with deeply-concerning financials and an unsustainable trajectory absent major changes. The company’s sheer level of cash burn makes me distrustful of taking any sort of long position here. Indeed, it is one of the top EV stocks to avoid, at least in my book.
Faraday Future Intelligent Electric (FFIE)
If Lucid gives me pause, Faraday Future (NASDAQ:FFIE) thoroughly alarms me. This stock has been enormously dilutive, and even a miraculous resurgence toward the top of the EV leaderboards would likely yield losses for existing investors, factoring in dilution. Realistically, I cannot see a pathway to success for Faraday Future.
The company’s FF 91 flagship SUV costs around $309,000, attainable only for a small number of very wealthy people who care more about how a car looks instead of its specs. Meanwhile, Tesla’s (NASDAQ:TSLA) Model X starts around $80,000 with positive margins. It’s hard to envision significant FF 91 demand at 4-times the price of comparable models on the market, from an unknown startup. This does not seem like a scalable business model.
Moreover, Faraday Future’s financials are frightening. The company remains in its pre-revenue stage, with no clear path to profitability amid stiff competition in the luxury EV sector. More cycles of reverse splitting and dilution seems inevitable in 2024. I would avoid buying this extremely speculative stock at all costs.
Hyliion Holdings (HYLN)
Unlike the first two EV stocks to avoid, Hyliion (NYSE:HYLN) shows some promise. Unfortunately, it’s just not enough promise for me to come close to recommend buying this stock.
Hyliion has reduced its cash burn and losses recently, which are expected to improve further in 2024. But analysts see losses nearly tripling in 2025, signaling an unsteady financial picture ahead.
My concerns stem from Hyliion abruptly abandoning its core electric powertrain technology to acquire an alternative fuel generator company. This late-stage strategic shift likely resulted in significant wasted capital on what was supposed to be the company’s core competitive advantage. Now, Hyliion must essentially start over in a new vertical.
While management did quickly realize the previous strategy was untenable, I question whether pivot number two will gain traction either. This rapid change of course does not breed confidence, at least for me. And with losses still mounting over the near-term as the company rolls out its costly transition, Hyliion has an uphill battle to first survive, before even thinking about thriving.
Hyliion’s fuel-agnostic generator technology does hold some intrigue. However, executing a dramatic strategic shift smoothly (while reducing losses) will prove very challenging.
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On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.