By Davis Donley
Global electric vehicle market penetration is only 2.8% and countries are pledging to reduce fossil fuel usage over the next decade. Consumers are becoming more concerned about environmentalism, governments are instituting global emissions regulations, and companies are improving charging infrastructure and driving ranges. The market is reacting favorably—the EV stocks tracked by Barrons are up roughly 325% year to date. The International Energy Agency projects that EV adoption will reach 125 million cars by 2030, and some analysts predict that by 2027, electric vehicles of all types will make up 40% of global light-vehicle output. While global EV sales increased by 65% from 2017 to 2018, EV sales have begun to slow. In 2019, year-over-year growth was just 9%. And in 2020, EV sales declined by 25% during the first quarter of 2020. Despite the inevitable future growth of EVs as fossil fuels are phased out over the next couple of decades, the lack of earnings, increasing competition, and the rich valuations of EV companies make them poor investments.
According to the United States Department of Energy, the price of battery packs—the rechargeable system that stores an electric vehicle’s energy—has dropped 80% since 2008. Currently, battery packs cost $150 to $200 per kilowatt-hour, and $100 per kilowatt-hour is the price at which vehicles will be cheaper to propel with electricity than gasoline. A few years ago, industry experts expected 2025 would be the turning point for electric vehicles. However, technology is advancing faster than expected, and EVs could reach parity with gas-powered cars cost wise by 2023. Through government subsidies which can cut the price by $10,000 per car, purchase prices of EVs in Europe are already close to those of gas-powered cars. However, government incentives to own EVs in the U.S. are not as generous, which is why U.S. EV sales only account for 2% of all new car sales, while the market share is 5% in Europe. China is quickly becoming the world’s largest market for electric vehicles, with Chinese companies like Nio and Li Auto capitalizing on new emissions regulations which will come into effect in China between 2020 and 2021. Shares of Nio have risen 2375% year to date—four times the gain of Tesla—as analysts have raised price targets due to the company doubling its October deliveries year-over-year.
Nio’s lofty market capitalization of 60 billion is a sign of the market euphoria for EV stocks. Nio is still years away from producing a profit and its 2019 revenue was only 5% of Ford’s, yet Nio’s market capitalization dwarfs Ford’s by $ 60 billion to $33 billion. A quick survey of EV stocks’ financials paints a picture of extreme valuations and little revenues. For example, three popular EV stocks—Tesla, Workhorse, and Nio—have trailing P/E ratios of 1138, 15261, and -44 respectively. These P/E ratios show that investors are paying a premium for future earnings growth, but every EV besides Tesla is a long way from profitability.
Tesla established itself as the industry leader with four consecutive quarters of profitability and technology which provides an economic moat compared to competitors. Less than two years ago, Tesla was fearful it may exhaust its cash reserves, but the company’s ability to sell half a million cars represents a monumental shift. Tesla’s 2020 quarter 3 sales of 145,036 vehicles marks a 40% increase year-over-year. Tesla’s four models are the only widely available electric cars that can drive more than 300 miles on a single charge, and Tesla recently unveiled a technology
offering 50% more storage per pound at lower cost. At the moment, Tesla possesses a competitive advantage, but money is pouring into the EV industry as carmakers seek to become the next Tesla. The search for the next Tesla has created a bubble in equities like Workhorse, Nio, and Nikola stocks because many of these speculative EV stocks have no profits to justify their valuations. “Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc. In my experience, the next of something almost never is,” says renown investor Peter Lynch. People are simply paying for an idea, but most ideas cannot justify a massive valuation.
With a market capitalization higher than any automaker in the world and a 1000% stock price increase since its 2019 lows, Tesla is certainly the hottest stock in the United States. While Tesla’s stock increase may be euphoric, its robust earnings and sales growth are indicators this stock will climb further over the long-term. High growth and hot industries attract a very smart crowd that wants to get into the business.
Electric vehicle companies have been going public rapidly through Special-purpose acquisition companies (SPAC), which are “blank check” shell corporations designed to take companies public without going through the traditional IPO process. Unlike a conventional initial public offering which can take a year and a half, a SPAC merger takes just a couple of months. SPACs raise money from investors without having a detailed business plan and their sole purpose is to be bought by another business within two years. If that doesn’t happen, the company folds and investors get their money back. Recently, Fisker agreed to merge with an acquisition company backed by Apollo Global Management and Nikola and raised $15B when it went public through a SPAC. SPAC IPOs have seen resurgent interest since 2014 as $13.6bn was raised across 59 SPAC IPOs in 2019 in comparison to $1.8bn across 12 SPAC IPOs in 2014.
The issue with dozens of EVs going public—sometimes without even a working prototype—is that there are more competing companies, leading to lower profits. A similar scenario occurred in the Dotcom boom when disk drive manufacturing exploded and reduced profits. There is no denying EV market penetration will increase over the next decade, but that does not necessarily mean profits will increase because more competition tends to lead to lower market share.
As investors searched for the next Tesla, they wishfully turned to Nikola, a promising EV using hydrogen fuel cells rather than lithium batteries to power trucks. After achieving a sky-high valuation greater than both Ford and General Motors’s market cap with quarterly revenue of only $30,0000, Nikola has been subject to investigation by the SEC. In a deceptive promotional video “Nikola One in Motion”, which showcased their 1000 HPtruck traveling down the highway, the truck was actually only rolling down a hill. Nikola’s former CEO and founder, Trevor Milton, also lied about reducing the cost of hydrogen by 81% relative to peers, when in fact, as acknowledged by the company’s statement in September, it has no hydrogen network. Further fraud was exhibited when Milton claimed on video that Nikola’s inverters were developed in-house. Nikola has since admitted this is not true. Nikola should serve as a warning to investors that although hot EV stocks can go up fast beyond any justifiable value, there’s usually nothing but hope to support them, and they fall just as quickly.
With EVs going public by the dozens in hopes of challenging Tesla, investors have bought the stocks in fear of missing out. Why not put off buying the stock until the company has a proven record? Rather than buying into an EV company amidst tremendous excitement and a lack of product and revenue, patient investors will be rewarded. Investors are not missing out on a golden opportunity because they did not buy right away. They should wait for the story to unfold and for the earnings to justify the price.
If an investor is bullish on EVs, they are better off investing in a proven, profitable EV like Tesla than speculating on a company with no product or revenue. It is crucial to recognize the difference between speculating and investing. In the case of electric vehicles, beware the longshots—companies with no proven record or revenue. Longshots are on the brink of solving the latest national problem and the solution is either very imaginative or impressively complicated. Investors flocked to Nikola and their hydrogen fuel cells, but the technology for hydrogen fuel cells is still in development.
Similarly to how the internet was the “next big thing” in the 90s, EVs will likely grow to be an enormous market in the 2020s, but a large market does not make every EV a good investment. With competitors entering the field swiftly, and traditional gas-powered car manufacturers also working on EVs, the industry is becoming oversaturated. Tech stocks dropped massively in the
early 2000s as they could not justify their rich valuations, and countless tech companies went out of business altogether. Over the next decade, a similar outcome may occur for electric vehicles as only the companies with competitive advantages who find their niche in the electric vehicle market will survive long-term. If an investor is bullish on electric vehicles long-term, rather than looking for the next Tesla, either invest in Tesla or wait until other EVs become proven market players.