Tesla and Other EV Stocks Are Bouncing Back. That Doesn’t Mean the Bubble Won’t Pop.
Shares of Canoo and other electric-vehicle companies rebounded on Tuesday after weeks of falling.
Courtesy Canoo
After a brutal selloff that lasted weeks, electric-vehicle investors were able to exhale on Tuesday as shares of those stocks rallied.
Tesla (ticker: TSLA) stock rose almost 20% on Tuesday after a 37% drop from its 52-week high. Other electric-vehicle stocks traded higher, too. NIO (NIO) shares gained 17% and Canoo (GOEV) jumped almost 10%.
The bulls are happy, but the bears aren’t buying it. Those in the latter camp are still calling electric-vehicle stocks a bubble and are looking for signs that it will pop.
“The excitement around electric cars in recent months has had the hallmarks of a bubble,” wrote Gavekal Research’s Louis Gave in a Tuesday report. He published a list of bubble warning signs that includes, for starters allegations of fraud. Gave pointed to Nikola (NKLA) as an example. In September, Short seller Hindenburg Research accused Nikola’s management of misleading investors, a claim that Nikola denies. The report has led to the exit of board chair Trevor Milton, an internal investigation, and a lower share price, among other things.
Also on Gave’s list are hubristic chief executives, a term he used to describe Tesla CEO Elon Musk. Musk certainly generates a lot of buzz and some controversy. Even so, Musk has succeeded in building a car company from scratch as well as sending astronauts to the International Space Station on a privately built rocket ship.
Gave also wrote there are “listings of dubious business model[s],” referring to companies with billion-dollar valuations and zero, or little, sales that have merged with special acquisition companies, or SPACs. That list includes Fisker (FSR), and Lordstown Motors (RIDE).
Finally, Gave said there is the math: “Valuations that assumed the kind of unit growth that seemed almost physically impossible to deliver.” For Gave, expected growth simply can’t keep up with battery, semiconductor, and lithium production.
Gave believes the bubble may be bursting. But that wasn’t his only point. His report was a warning to investors to lighten up on what he called “derivative plays” including battery and lithium suppliers as well as semiconductor companies that sell into the auto market. Three examples that fit that profile are Contemporary Amperex Technology Co (300750.China), Livent (LTHM), and On Semiconductor (ON). Those three stocks are up about 120% on average over the past 12 months.
Research Affiliates’ Rob Arnott sounded even more bearish than Gave. In a report published Tuesday, he called electric vehicles a “big market delusion” because the stocks are all rising and falling together, despite the widely differing prospects of many firms. There will be winners and losers, according to Arnott, but the market isn’t differentiating.
He doesn’t sound upbeat on any potential winners, either. “In the highly competitive and capital-intensive auto industry, the January 2021 valuations of electric vehicle manufacturers are simply not sustainable over the long term,” wrote Arnott.
Arnott pointed out that electric-vehicle makers are worth roughly the same as the entire traditional automotive industry despite generating a tiny fraction of sales. “The EV phenomenon will not change the fact that the auto industry will remain highly competitive and capital intensive,” added Arnott. “Not every company can be a winner.”
That might be the case. Still, Amazon.com (AMZN) got its start in the dot-com bubble.
Arnott and Gave have had the upper hand in the electric vehicle debate for a couple of weeks, but bulls are feeling better after Tesla’s rally on Tuesday. Shares rose for multiple reasons: The stock was upgraded by New Street Research analyst Pierre Ferragu, February China deliveries demonstrated the global electric vehicle market remains healthy, and the Nasdaq Composite rallied 3.7% as inflation fears subsided. The Nasdaq is home to many richly valued, high-growth companies Tesla. Higher inflation means higher interest rates, which makes it more expensive for companies to fund all that growth. Plus, because growth companies generate most of their cash flow years down the road, that cash is less valuable, relatively speaking, when investors can earn more interest on their money in the present day.
The debate won’t be settled soon and the bulls have other arguments, too. They say electric-vehicle companies grow faster than traditional automakers and deserve high valuation multiples. What’s more, for every electric vehicle that, say, General Motors (GM) sells, there is a gasoline-powered car that goes unsold. There is little net growth for a traditional automaker converting to an electric powertrain, so GM shouldn’t be valued like a growth stock. Finally, bulls argue there is an autonomous driving component to automotive valuation that the entire marketplace must wrestle with. It is possible that self-driving software can generate extra sales never realized before by all automakers.
There is a lot to consider. That makes one day’s gyrations even more difficult to interpret.
Write to Al Root at [email protected]
