The lukewarm reception for Polestar, the latest electric-vehicle company to go public in the U.S., is sending an ominous message to other startups: The purge isn’t over. 

Yes, the auto industry is due for a transformation as oil prices soar and the need for cleaner transportation becomes increasingly apparent. But, runaway inflation and a looming economic downturn is making investors leery of speculative investments, which includes EV makers despite the allure of the coming revolution. 

Polestar’s tepid welcome — the stock jumped 16% on its first day of trading Friday and then dropped 15% on Monday — is the latest evidence of that skepticism. The Swedish electric carmaker went public after merging with blank-check company Gores Guggenheim Inc. The company’s market valuation stands at about $24 billion as of Monday’s close. The stock price was climbing back up on Tuesday but was still down from its debut, hovering just below $11 a share.

“EV stocks benefited greatly from the abundance of liquidity that had been sloshing around the system for two years,” said Matthew Maley, chief market strategist at Miller Tabak + Co. “Now that this liquidity is disappearing, investors are going to have to revalue these EV names.” 

Tighter market conditions aren’t the only obstacles facing startups. The challenges are manifold, with raw material costs surging, supply-chain shortages refusing to let up and high car prices threatening to weigh on demand. Any new entrant to the EV industry is in an especially tricky situation, since materials used in EV batteries have seen some of the most intense inflation, forcing companies to raise the price of their already expensive cars, trucks and SUVs. 

On top of that, the automakers don’t yet have loyal customer bases to lean on. That’s a big advantage for stalwarts like General Motors, Ford Motor and even EV market leader Tesla.

“When you are spending that kind of money for a vehicle, you at least want it to be reliable and know that the company will be around in a few years time,” said Greg Martin, managing director and co-founder of Rainmaker Securities. 

Several EV-makers have lately seen the initial enthusiasm for their stocks evaporate. Anaheim, California-based Phoenix Motor is trading nearly 11% below its June 7 IPO price of $7.50 per share. Rivian Automotive has fallen 64% since its debut in November, while Luxembourg’s Arrival SA has lost more than 90% since listing in the U.S. 

They’re part of a broader wave of weakness among recent IPOs as investors shy away from risk due to higher market volatility — a main reason this has been the weakest first half in nearly two decades for global stock offerings.

Yet, the market valuations of EV startups Rivian or Lucid Group still don’t fully reflect all the risks, experts said. Rivian is currently valued at about $26 billion, while Lucid Group stands at around $31 billion. In comparison, century-old Ford, which has a slew of EVs coming out in the next few years and a broad portfolio of profitable internal combustion cars and trucks, is worth about $48 billion.

Rivian shares trade at a multiple of 129 times its sales, and Lucid at 359 times. For Ford, that number hovers around 0.4 times, according to Bloomberg data. For EV trailblazer Tesla, often criticized for its own high valuation, the price-to-sales multiple is 12.

“The entire EV sector — Tesla included — remains overvalued based on any conventional metrics,” said Steve Sosnick, chief strategist at Interactive Brokers. While investors are still willing to pay a premium for the prospect of an EV future, certainly not all of the startups can meet the promise that the market is pricing in, Sosnick said. “That promises more swings ahead as investors handicap the eventual winners and losers.”

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