It was a slightly slower news week as the markets prepare for earnings season to hit in full force, but there were plenty of headlines to go around within the automotive sector. One piece of news that hit young electric vehicle (EV) automakers hard was the announcement by Hertz Global (NASDAQ: HTZ) that it will sell a chunk of its EV fleet and reinvest in gasoline-powered vehicles. In response, Lucid Group (NASDAQ: LCID) and Fisker (NYSE: FSR) dropped as much as 17% and 26% this week, respectively, according to data provided by S&P Global Market Intelligence.

The Hertz move hurts

Hertz, one of the world's largest vehicle rental companies, announced it plans to sell a third of its U.S. EV fleet and instead reinvest in gasoline-powered vehicles. Hertz began selling the 20,000 EVs last month and will continue throughout the remainder of 2024.

It was a sudden turnaround from Hertz's 2021 stance. Back then, it announced it would buy 100,000 Tesla (NASDAQ: TSLA) vehicles -- Tesla was down as much as 5% for the week -- and the rental company will record a noncash charge of roughly $245 million during its fourth quarter.

"The elevated costs associated with EVs persisted," Hertz CEO Stephen Scherr said in an interview, according to Bloomberg. "Efforts to wrestle it down proved to be more challenging."

To make matters worse, Lucid also reported lower sales in the fourth quarter this week. On Thursday, Lucid announced full-year 2023 deliveries of just 6,001 units, and its fourth-quarter deliveries dropped 10% compared to the prior year.

Pumping the brakes

Originally, Hertz set its sights on electrifying a quarter of its fleet by the end of 2024, but it has since pulled back to better match supply and demand, with a focus on improving margins. That leaves little room for the higher repair costs associated with EVs, as well as an EV price war that has brought down the value of Hertz's EV fleet.

Sure, Hertz selling 20,000 EVs to make room for more gasoline-powered vehicles won't move the needle by itself, but for investors and Wall Street, it's just another signal that the transition from gasoline-powered vehicles to EVs is progressing slower than anticipated.

This slower-than-anticipated transition to EVs is bad news for young EV makers dealing with high interest rates, high EV price tags, and often a cash crunch. Automakers are even dealing with the possibility that the return of student loan payments, which took a three-year hiatus, could hinder young consumers trying to purchase vehicles.

The road ahead

Hertz's pullback on EVs could confirm for many investors that demand is waning and that growth will remain slow. On one hand, EV sales during the fourth quarter set a record for both volume and share at 317,168 units and 8.1%, respectively. But on the other hand, the fourth-quarter year-over-year growth of 40% was slower than the third quarter's 49% gain or the 52% gain during the fourth quarter of 2022.

While investors in young EV automakers would love the transition to kick into a higher gear, the transition to EVs was always going to take time. Slowing growth for EV sales is simply a hurdle EV makers will have to offset as much as possible through lowered costs and more efficient operations.

Investors should also remain optimistic about growth, even if it's slower than anticipated. 2024 will bring more product offerings, more leasing options, more charging infrastructure, and more incentives, and eventually these factors will push sales higher.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

Why These EV Stocks Plunged Double Digits This Week was originally published by The Motley Fool