EV stocks have been on a fire this year. So far, Tesla (TSLA) was the favorite stock for those betting on vehicle electrification. While it is still might be the favorite pick for EV bulls, some of the other stocks have also rallied this year. In this article, we’ll look at some of the reasons why I believe the rally in EV stocks looks like a bubble.
EV stocks are trading are crazy valuations. For instance, Tesla’s market capitalization is above Toyota that sells more than 20 times the vehicles that Tesla sells. Nikola’s market capitalization recently moved above Ford’s. As for Nikola, it does not have any current revenues or even a prototype of its upcoming vehicle. It does have $10 billion in pre-orders. Even on a time series analysis, Tesla’s next 12 months EV-sales multiple of 8x is the highest we’ve seen for the stock.
The second reason I see a bubble is because markets are valuing EV stocks on pre-orders and total addressable markets. With the benefit of hindsight, we know that the last time markets valued companies on metrics other than the established or what many EV bulls might see redundant metrics was in the dot com bubble. Back then, markets valued companies on “number of clicks” but these eventually did not tun into profits for most of the companies of that era.
The third reason I see EV stocks in a bubble is because of an apparent FOMO trade in some of the not so well known EV plays. Over the last three months, NIO, Nikola, Workhorse, and Blink Charging are up 292%, 429%, 1160%, and 225% respectively. Let us first accept, a lot of investors missed out on the sharp rally in Tesla stock. Either they did not own the stock in the first place, sold it too early, or were outright short on the stock. With Tesla share price now around $1,400 at the time of writing this article, investors seem to be betting on the “next Tesla” which I see a FOMO trade.
While the rally in EV stocks has caught the markets’ attention, even the companies have taken cognizance of the rise. In February, Tesla announced a share issuance, weeks after CEO Eon Musk denied a possibility in the Q4 2019 earnings call. NIO too capitalized on the opportunity and issued ADRs. Again, nothing wrong in companies issuing shares to fund their growth. But then, both these companies sold more shares than initially planned and the stock markets celebrated the news sending the stocks even higher. For good old investing, stock issuance comes at a cost of dilution. But then, dilution does not seem to scare away EV bulls. Notably, Tesla issues a lot of stocks as stock-based compensation every year as well and excludes it while calculating the non-GAAP income. Famed value investor Warren Buffett is not a fan of companies that exclude stock-based compensation from their earnings.
In his last year's shareholder letter, Buffett said, “managements sometimes assert that their company’s stock-based compensation shouldn’t be counted as an expense.” He added, “What else could it be – a gift from shareholders?”
Markets do not seem to be paying any heed to execution, disruption, or competition risk for EV stocks. The EV industry is still very naïve and different companies are developing new technologies. For instance, some like Toyota is betting on hydrogen vehicles. We might even get something disruptive from an established automaker. However, the way EV stocks are rallying it seems markets do not give legacy automakers any chance in the EV market.
While EV stocks have rallied this year, crude oil prices have plummeted and would likely remain low for long. I would see lower crude oil prices as a negative for EV stocks as it reduces the attractiveness of an electric vehicle. Also, governments would not be too keen on EV subsidies if their oil import bill is in check.
To sum it up, I do believe that the growth in vehicle electrification is for real and also the need of the hour given the climate change. However, at the same time, I see a bubble building in EV stocks at current prices.
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