“It’s expensive on what we know, and cheap on what we don’t know.” - A buyside analyst to the Financial Times about how to justify Tesla’s valuation
I am not sure I’ve ever seen a quote that so perfectly marks the speculative insanity of a bubble. I’m not sure why, but this reminded me of the 2007 Chuck Prince (then CEO of Citigroup) quote, “As long as the music is playing, you've got to get up and dance,” he said. “We're still dancing…”.
That Chuck Prince quote so obviously marked the top of the housing market and the out-of-control lending, you just knew at the time it was a keeper. And I think the above quote can also mark the top or near top of the electric car bubble.
Here is another quote to consider from investor Gavin Baker of Atreides Capital:
The top public and private electric car companies (Tesla, NIO, XPeng, Li Auto, Arrival, Nikola, Hylion, Workhorse, Fisker, Velodyne Labs, Kandi Tech, Electricameccannica, Acrimodo, Rivian, Lucid Motors, Canoo, Faraday, and I’m sure I’m missing others) now have an enterprise value over $700 billion. That breathtaking number doesn’t include the market caps of Toyota, Volkswagen AG, Daimler AG, Ford, Honda, BMW, General Motors or Fiat Chrysler. Check out the recent charts of Nio and Arcimodo:
There are multiple ridiculous things to observe about this bubble besides the sheer size. The best one may be the biggest promoter of them all, Elon Musk, is cautioning investors:
(Note he is referring to Special Purpose Acquisition Corps, SPACs, which are all the rage for bringing electric vehicle companies public.)
The auto industry is not the software industry and has super low margins. Even Tesla with their expensive premium cars only produces a gross margin of 22%. Toyota’s gross margins are only 17%.
It’s also fun to note that none of these companies make money from cars, even Tesla doesn't make money on cars, only on re-selling regulatory credits.
Then consider the crazy story of Nikola, which involved pretending an electric truck was driving itself, but it was actually rolling downhill. There is even more that can be found here: https://hindenburgresearch.com/nikola/
As these stocks keep rising, there is an assumption that the existing older car companies are dinosaurs bound for extinction. But maybe the dinosaurs won’t go so quietly into the night. General Motors for example, plans on spending $27 billion on electric cars in the next four years alone.
And if you pay attention to electric vehicle sales in Europe, you can see that while Tesla is the clear leader, they only have 18% of the market share in latest sales data, and this is before the surge in new electric vehicles planned from the incumbents.
Note that Renault has a 12% market share of EV sales in Europe, yet only has a $9 billion market cap.
What is an investor to make of all of this? I think the only sensible thing is to run away from the whole sector. I have no desire to short bubble stocks and no desire to invest in an industry with an explosion of competition. Capital is surging into the industry and I think it is going to be a real dog fight. While this bubble may be fun to watch from the outside, I do not envy any of the participants. I think the only real long-term winners may be consumers and the environment.
Interested in learning more about these electric car companies? Here is more from the Wall Street Journal: https://www.wsj.com/articles/these-11-ev-startups-are-chasing-tesla-they-cant-all-win-11605884422?mod=hp_lead_pos10