After a lackluster performance this year, shares of several publicly traded electric vehicle firms decided to end an embattled 2022 on a high note. Specifically, Arcimoto (NASDAQ:FUV), Blink Charging (NASDAQ:BLNK), EVgo (NASDAQ:EVGO) and Lion Electric (NYSE:LEV) saw significant gains on Friday. What made EV stocks stand out more was that the major indices printed red ink. Nevertheless, the sector carries a somewhat ambiguous tone, requiring careful due diligence among prospective investors.
Today’s lift in EV stocks arrived without company-specific news. Instead, market participants may be banking on the industry ahead of tax credits that might bolster sales. According to the Associated Press, starting Jan. 1, American consumers that meet certain requirements may qualify for a tax credit of up to $7,500 for making the pivot to electrification. The credit stems from tax incentives associated with the Inflation Reduction Act.
To be clear, receiving the full credit may be a difficult task due to what the AP calls “a complex web of requirements.” These include restrictions on where vehicles and underlying battery components may be manufactured. However, for at least the first two months of 2023, the Treasury Department’s delay regarding rule solidification will likely make the full credit available for customers who meet baseline income and price limits.
Starting in the new year, the $7,500 maximum credit will apply to qualifying new EVs along with some plug-in gas-electric hybrids and hydrogen fuel cell vehicles. Further, people who buy a used battery-run vehicle may receive up to a $4,000 credit.
Fundamentally, the vehicles must be assembled in North America, which then puts EV stocks tied to foreign assembly at a disadvantage. However, the President Joe Biden administration recently signaled a willingness to address concerns of European and Asian allies.
EV Stocks Still Face Tough Challenges
On the surface, the tax credits should be net beneficial for EV stocks as they provide a financial incentive for drivers to make the pivot to electrification. Per Mike Fiske, associate director for S&P Global Mobility, the credits will boost EV sales. However, the journey will probably take a few years. Unfortunately, manufacturers currently produce all the EVs they can possibly make due to supply shortages.
Another cautionary tale centers on recent geopolitical tensions and flashpoints. Per the AP, “[s]tarting in 2025, battery minerals cannot come from a ‘foreign entity of concern,’ mainly China and Russia. Battery parts cannot be sourced in those countries starting in 2024 — a troublesome obstacle for the auto industry because numerous EV metals and parts now come from China.”
However, the problem is that as EV stocks become more ingrained in the broader mobility segment, commodity demand will rise. Currently, China represents the seventh-largest producer of nickel, a critical component of EV batteries. And Russia comes in third place regarding global nickel production. Therefore, weaning off hydrocarbons may lead to more unfavorable geopolitical dependencies, not less.
Finally, EV tax credits pose a problematic framework. In recent years, several critics pointed out that such legislation favor corporations and wealthy Americans. Fundamentally, one must have tax liabilities for the credits to offset. Those with lower tax obligations will receive a lower credit.
To be fair, the proposal outlined under the Inflation Reduction Act imposes a qualifying income ceiling. However, dealerships can potentially hike prices knowing that demand may rise for certain vehicles. Therefore, the ultimate benefit to EV stocks remains open to debate.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.