Despite the broad-based tech bull market, times haven’t been easy in the EV space. From big boys like Tesla (NASDAQ:TSLA) and BYD (OTC:BYDDF) to emerging startups such as Canoo (NASDAQ:GOEV) and Sono Group (OTC:SEVCQ), the industry appears to have lost momentum on both the equity and financial sides.
But while the rout has hit the sector as a whole, smaller companies are bearing the bigger brunt, with multiple stocks trading near or at 52-week lows.
As most of these companies rely on loans to drive growth and innovation, persistently high interest rates have ballooned debt levels on their balance sheets, increasing the risk of bankruptcy. At the same time, declining consumer demand keeps pressuring future growth projections — a true double whammy.
“We could be bound to see tons of bankruptcies within the industry,” warns Joseph McCabe, President and CEO of AutoForecast Solutions.
Against this backdrop, many analysts are beginning to wonder whether larger EV and other legacy players will be looking to speed up their EV plans via takeovers.
Such is the case of Sandeep Rao, Senior Researcher at Leverage Shares. “Given the current circumstances, consolidation within the EV industry is entirely logical,” he notes.
Larry Tentarelli, Chief Technical Strategist at Blue Chip Daily Trend Report, also believes the scenario could favor M&As, but prefers to adopt a more cautious stance: "Consolidation is highly possible, but we do not believe it is a given,” he ponders.
New Electric Car Companies On The Horizon
Just last week, Reuters reported that Nissan (OTC:NSANY) is in advanced talks to invest more than $400 million in smaller pure EV player Fisker (NYSE:FSR). This move could offer a much-needed financial boost to the struggling startup while broadening the Japan-based EV product offering and production in the US.
More recently, Gene Munster of Deepwater Asset Management stated that Apple (NASDAQ:AAPL) acquiring failing Rivian (NASDAQ:RIVN) could be an interesting proposition for the iPhone maker following the announced shutdown of its EV plans.
Interviewed exclusively by Investing.com, Leverage Shares’ Sandeep Rao sees Lucid (NASDAQ:LCID) as a potential target for a full takeover. “Since Lucid is already majority-owned by the Saudi government, it will be a reasonable measure for the latter to unload its stake to a larger carmaker in exchange for shares, cash, or both,” he explains.
Also consulted by Investing.com, Larry Tentarelli agrees that Lucid may become a potential target, adding that Rivian also presents similar conditions: “In the U.S, Lucid and Rivian appear to be the most vulnerable, based on their poor cash flow.”
Outside of the US, China looks like a potential market for consolidation, albeit at a slower pace. “China is littered with a massive number of EV carmakers with varying levels of investment from provincial and state governments and often with little to show by way of strong market share trends. The consolidation over there will be a more subtle exercise,” adds Sandeep Rao.
Indeed, another key factor to watch in this equation is China. According to AutoForecast Solutions’ McCabe, Chinese companies will “start moving into the US fast, and they will need to acquire brands that sound domestic to the American public.”
Electric Vehicle Industry Forecast 2024
But while EV merger talks are growing more frequent in the media, they remain only on the speculation side for now. In fact, many other analysts believe that companies will have a hard time making these bets amid the current macroeconomic environment.
“The future we saw in 2021 when financial costs were null, and everybody was taking risks is not the future we see now for the next ten years. Money will cost money, which means EV companies will have a harder time making bets,” ponders Ross Gerber, President and CEO of Gerber Kawasaki Wealth and Investment Management.
He adds, “the risk in the equity environment won’t necessarily pass on to companies, particularly in the EV space, as balance sheets remain strained.”
Indeed, as Dealogic data shows, M&As are still lagging in general despite the overall rebound in equity and debt capital markets in 2023. According to the research agency, total global M&A value was down 25% YoY in 2023 and 23% in North America, with the technology sector being hit the hardest.
Moreover, a pronounced slowdown in consumer demand promises to keep the industry’s margins squeezed in the mid-term, at least. “Next year, we should have a flattening of the growth curve in the EV industry,” says McCabe.
“In the US, China, and now Europe, the price war in EVs is eroding margins further, making it very difficult for these companies to make money despite generous incentives. This isn’t just about Tesla - i.e., everyone is losing,” notes Gordon Johnson, CEO at GLJ Research.
This backdrop decreases the possibility of a takeover, as the big players also find themselves with less cash to spare. “The EV industry is weak currently, and for a leader like Toyota (NYSE:TM), Stellantis (NYSE:STLA), Ford (NYSE:F), or General Motors Company (NYSE:GM) to take over one of the struggling EV firms could put undue pressure on their balance sheets,” adds Larry Tentarelli.
Bottom Line
Given the current conditions of the EV market, consolidation appears more likely in the mid-term than now. “The good smaller brands, sadly, will likely be swallowed by big manufacturers that can scale and find other ways to get synergies out of the business,” notes Ross Gerber.
However, with the Fed pivot in sight, conditions could change fast - particularly if rates fall faster than expected. “If conditions were to improve, the acquirer wouldn’t be as unconcerned but might be able to offer up a higher price via cheaper debt issuances,” concludes Sandeep Rao.
Top 5 EV Stocks by Market Cap
Looking to keep an eye on potential M&As in the EV space?
Here are the top and bottom 5 EV stocks by market cap:
Top 5:
- Tesla - 575.62B
- BYD - 74.86B
- Li Auto (NASDAQ:LI) - 39.79B
- VinFast Auto (NASDAQ:VFS) - 12.57B
- Nio (NYSE:NIO) - 12.00B
Bottom 5: