Electric Vehicle (EV) Stocks Tesla (NASDAQ: TSLA), Rivian (NASDAQ: RIVN)And QuantumScape (NYSE: QS) were all up 4.3%, 8.8% and 4.3% respectively on Friday (as of 2:28 p.m. ET).

There was no news today about specific companies, so the moves can likely be attributed to Federal Reserve Chairman Jay Powell’s upbeat speech today at the annual conference in Jackson Hole.

The prospect of lower interest rates would be a huge boost for all stocks that have been hurt by rising interest rates over the past two years. Electric car stocks are among the hardest hit.

“The time has come”

Powell made headlines this morning when he declared in his speech, “The time has come for a policy adjustment.” The declaratory statement was perhaps more definitive than investors had expected, signaling that the Fed will definitely cut rates in September, perhaps by as much as 50 basis points. In July, the Fed had left the federal funds rate unchanged at cycle highs, just before a weak jobs report, several soft inflation numbers and a downward revision to job growth were released recently.

That led to concerns that the Fed was too late in cutting rates, which could lead to a recession. However, Powell seemed fairly confident in his speech that the data points more to a “soft landing,” or lower inflation and interest rates without serious job losses, thanks to the central bank keeping long-term inflation expectations anchored. Powell said: “A key lesson from recent experience is that anchored inflation expectations, reinforced by strong central bank actions, can facilitate disinflation without the need for slack.”

Electric vehicle stocks have been soaring, and it’s not hard to see why. Electric vehicle stocks have been hit hard by high interest rates in two ways in recent years.

First, cars are expensive to buy and are usually financed with auto loans. Additionally, electric vehicles are generally more expensive than internal combustion engine vehicles, making the purchase even more daunting. In response to higher rates and lower demand, electric car companies have slashed prices to shift volume, squeezing margins. You can see how even market leader Tesla’s margins have gone south:

The second way high interest rates hurt EV companies is by increasing the cost of capital and hurdle rates. This is especially bad for companies with low profit or loss, like Rivian and QuantumScape, and even for companies with high multiples, like Tesla.

The story continues

Because companies with high multiples or loss-making earnings theoretically have all of their profits far in the future, higher interest rates reduce the present value of those future income streams. In addition, loss-making companies may need to raise more capital, and higher interest rates make that more expensive, which also hurts the intrinsic value of a company.

So a cut in interest rates without a recession would be a huge relief for EV stocks on those two important fronts.

But lower rates are not a panacea

While lower tariffs would certainly help a lot, you have to remember that unlike other technologies, auto manufacturing is generally a capital-intensive, cyclical, competitive, and low-margin business. That’s why mature auto companies tend to trade at low P/E multiples.

Of course, each of these companies seems to be ahead of the curve these days. Tesla has long been known as a technology leader, but is betting big on robotaxis that may or may not pay off, and competition is creeping up on its leadership in EV technology.

Rivian is certainly a formidable company and has forged prominent partnerships with the likes of: Amazon and more recently VolkswagenStill, Rivian suffered an operating loss of $1.4 billion in the most recent quarter alone, so its path to profitability certainly remains in question.

Meanwhile, QuantumScape is not only loss-making, but pre-revenue, as it works to commercialize its solid-state battery technology. While solid-state batteries could revolutionize the EV and automotive industries with their increased efficiency over lithium-ion batteries, the company is also losing money, with an operating loss of $134 million in the last quarter alone, and less than $1 billion in cash on its balance sheet.

Interestingly, QuantumScape also recently struck a deal with Volkswagen that will inject more cash through a technology license, but also transfer QuantumScape’s intellectual property to Volkswagen going forward. Both of the VW deals should help Rivian and QuantumScape’s dwindling cash positions, but it could also be that Volkswagen is making a smart deal with both players to get their cutting-edge technology at a good price, given the dire situation of both companies.

As you can see, interest rates are just one piece of the puzzle. The auto industry is being disrupted by EV and autonomous technologies with a high degree of uncertainty, so investing in the sector is not for the faint of heart — even with lower rates.

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Why Tesla, Rivian, and QuantumScape Rally Today was originally published by The Motley Fool