Why electric vehicle stocks like Rivian and Nikola fell today

What happened

The electric vehicle (EV) sector of the auto industry has seen some good days in the stock market lately, but Tuesday wasn’t necessarily one of them. Amid some troubling news from one of its major peers, investors traded off a host of electric vehicle headlines.

Among the sector stocks that suffered a decline was the maker of pickup trucks and SUVs Revan Cars (Raven -4.09%)which slid to a loss of more than 4% on the day, and the truck specialist Nicola (Nickla -2.52%) With approximately 3% segment. Storage solutions maker Freer battery (Free -0.72%) It performed relatively well with a decline of “only” 0.7%. For comparison’s sake, Standard & Poor’s 500 The index decreased by 0.2%.

so what

Early Tuesday, the influential Chinese EV company New It announced that it is seeking to raise at least $1 billion in funding. Specifically, it aims to issue two series of convertible bonds, one maturing in 2029 and the other the following year.

Investors were not thrilled with this news, and it is easy to understand why. While Nio has shown some very encouraging growth and is an important player in a huge market, the Asian company is unprofitable and cash flow negative, so $1 billion is a pretty big bandaid to help heal its finances.

Convertible bonds are so named because they begin their life as debt securities; Under certain terms and conditions, it can be converted into stock. But that much debt and/or equity would be either detrimental to the balance sheet, or at least slightly dilutive to existing shareholders, or both.

Nio’s move illustrates an uncomfortable reality that all investors in electric vehicle and alternative fuel stocks will have to face sooner or later: many companies in the sector are consistently unprofitable and in need of financing.

Rivian, despite taking the lead with its R1T EV pickup truck, has a troubling string of net losses behind it. Nikola’s final numbers were much deeper into the red, while the smaller Freer flipped into the red (by more than $25 million) on a year-over-year basis in the most recently reported quarter.

What now

Meanwhile, the electric vehicle sector in the United States is populated by a host of developers and manufacturers vying for space in every conceivable niche. Right now, it doesn’t look as if Rivian, Nikola, Freer, or a host of their other peers are about to go to the well for a big pool of funding… but given their loss-making ways, it’s not out of the realm of possibility, either.