fell sharply in trading on Wednesday, exacerbating the recent pain of investors. Electric vehicle stocks are rocked by issues ranging from interest rate changes to microchip shortages. Today’s happened for a new reason.
NIO (ticker: NIO) shares fell nearly 7%. XPeng (XPEV) shares fell 8%. The worst on Wednesday was Li Auto (LI), which fell nearly 13%.
However, EV investors cannot use the stock rotation of tech companies as an excuse. In recent years, old-economy value-based stocks have outperformed tech stocks as the global economy emerges from the Covid coma. AT
Nasdaq Composite Index
fell just 0.1%. AT
Russell 1000 Growth Index
both closed about 0.2%.
So what’s hurting China’s EV stock? Li Auto appears to be responsible for this drop, announcing plans to place $ 750 convertible bonds, which is tantamount to a capital increase. Convertible bonds, as their name suggests, convert to common stock under certain conditions, and investors don’t like it when their existing shares are diluted with new stocks. This is the reason that an increase in capital leads to a decline in stock prices for a while.
A convertible bond may cause some selling pressure in another way. Convertible arbitrage traders will sell the issuer’s stock at short notice and buy a convertible bond. In this way, they can lock in a relatively attractive bond yield and eliminate the equity risk inherent in the convertible bond from their yield equation.
After falling Wednesday, shares in NIO, XPeng and Li are down more than 20% on average this year. Electric vehicle stocks in the US aren’t that hot either.
(RIDE) has dropped 41% this year, while
Group of Working Horses
(WKHS) fell 44% and
fell by 19%. All three stocks had their own problems, such as negative research reports and contract losses.
(TSLA), which fell just 4.9% in 2021, is down 24% from its peak in January.
Electric vehicle investors have already done a lot in 2021. Higher interest rates, which increase the cost of funding growth and reduce the value of future cash flows, are negatively affecting EV stock. So is the lack of chips. For example, NIO’s inventories fell after the company cut supply due to a lack of chips. Now the specter of capital gains is further undermining investor confidence.
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