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Look out below!<\/p>\n
Via ChatGPT<\/p>\n
The headlines about the U.S. electric vehicle markets are going to be ugly over the next six months or more. Don\u2019t fall for it.<\/p>\n
Experienced investors know to look at underlying fundamentals when evaluating opportunities, and to take the long view. The U.S. market for EVs is in a classic \u201cTrough of Disillusionment\u201d<\/a> right now, and it will feel even worse temporarily as price declines start to hit in earnest. This will send many investors running for the exits, and in fact many have been doing so already. <\/p>\n But this could be a mistake, at least for long-term investors, given clear signals of market adoption intentions and looming price drops. Ironically, these price drops are just going to make the headlines worse in the near term. But they are also opening up strong new opportunities.<\/p>\n (Important disclaimer: As recently announced<\/a>, I have taken on the CEO role with one of my firm\u2019s portfolio companies in the EV financing sector)<\/p>\n Let\u2019s look at the reality of the situation right now.<\/p>\n Stalled market growth is not a \u201cdecline\u201d, it\u2019s a pause<\/p>\n Many generalist investors I speak with mention that they\u2019ve heard the market for EVs in the U.S. is in decline. They have gotten this impression from superficial news coverage of the industry.<\/p>\n In reality, while the growth of EV adoption in the U.S. has certainly stalled, it is still healthy and poised for resumed growth. And that\u2019s despite a fair amount of negative press coverage of the industry, which should have driven down buyer interest. Seemingly every time an electric vehicle catches on fire anywhere, for example, it makes the news \u2013 despite the fact that EVs are actually 60 times less likely<\/a> than internal combustion engine vehicles to have a fire. Tesla as a company has seen a ton of self-created negative publicity over the past few years, and since they remain the dominant brand of EVs in the U.S., they are synonymous with the entire EV market in the eyes of many. And definitely some EV startups have gone bankrupt; that tends to happen with all kinds of startups, but companies in this sector tend to get more attention than the average startup that goes belly-up. Hence, lots of negative headlines.<\/p>\n But meanwhile, EV adoption has remained relatively steady. While Q2 sales volumes of EVs were down 6%<\/a>, garnering lots of headlines, that dip was largely in line with previous dips over the past few years. On the other hand, Q3 sales volumes will certainly be way up; that doesn\u2019t mean the market is suddenly taking off, it\u2019ll just show that people were racing to beat the expiration of federal incentives. Really, EVs have been steady between 7-9%<\/a> of all new auto sales for a couple of years, despite quarterly ups and downs. Don\u2019t trust the tone of EV-related headlines when they are either very negative or very hyped, market demand for EVs is not nearly as fragile or volatile as some seem to think.<\/p>\n In fact, while consumer adoption has stalled, commercial adoption of EVs has continued to grow<\/a>, albeit from a smaller base. For some reason, commercial EV adoption in the U.S. has lagged behind consumer adoption trends. So there\u2019s some catching up to do there, and that appears to be underway.<\/p>\n Overall, EV sales have not really been in decline. They\u2019ve been flat for a couple of years now, yes. But there\u2019s a difference between that and a market that has somehow peaked and is headed downward from here. Indeed, many investors strongly believe that most transportation will eventually become electrified. They just don\u2019t know when.<\/p>\n EV prices are about to go into even steeper decline<\/p>\n One thing that has continued to buoy buyers\u2019 interest in EVs despite all the negative headlines is that prices have fallen significantly over the past couple of years. Tesla cut their prices sharply last year as their market share eroded, leading Hertz to need to unload much of their Tesla fleet<\/a>, creating a flood of used Teslas on the market. <\/p>\n Now in 2025, the early expiration of the federal tax incentives for EV purchases is expected to drive costs down further. Hyundai already reportedly slashed their prices<\/a> on Ioniq 5s by more than $9,000, literally the day after the incentives expired.<\/p>\n What will make price drops accelerate even more, especially in the used vehicle market, is the fact that a \u201cwall of returns\u201d<\/a> from expiring 2022-2023 leases mean tens of thousands of EVs coming back to the manufacturers\u2019 captive finance arms, who will then have to sell many of them (few have yet solved their \u201cyear 3\/4 problem\u201d for re-leases). This is more acute for EVs because a high proportion of them were leased versus sold starting in 2022. Industry participants that I speak with expect this wave to really start hitting in February 2026. <\/p>\n In Class 8 vehicles (semi trucks, etc) the prices are also about to drop significantly. And once again, Tesla is involved as the protagonist, albeit this time with different motivations. While such heavy-duty vehicles have been readily available with dropping prices in other regions around the world, in the U.S. the market has been dominated by just a couple of manufacturers, who make EVs as almost a side-gig to their much larger diesel semi manufacturing volumes. Among those I speak with who track the market closely, some note that the prices on these incumbent OEMs\u2019 EVs have actually gone up over the past couple of years, not down. But later this year and into 2026, the Tesla Semi is expected to be released to the market, and at a significantly lower price point than the existing options (reportedly, mid-$200,000s versus $400,000+). Many in the segment are eagerly awaiting the pricing impact that Tesla\u2019s entry will bring to the heavy duty EV market.<\/p>\n Given that news reports about the EV industry seem prone to overhyping both the highs and the lows of the market, how will mainstream investors react to significant price drops for both new and used vehicles, and across light duty to heavy duty? They will likely conclude that it is a demand-side problem. In reality, investors should remember that these price drops will be all about the supply side, due to the incentives event coinciding with the birthing pains of the used EV market (which is only now getting established).<\/p>\n The fundamentals already make EVs an economic option in many cases<\/p>\n \u201cOkay,\u201d some readers may say, \u201cmaybe there are extenuating circumstances between the stalled sales volumes and dropping prices and negative headlines. But that doesn\u2019t mean I need to jump into a market for what is essentially a luxury item that doesn\u2019t make economic sense without government support. Especially when that support is going away.\u201d<\/p>\n