While Thursday signaled a significant step back for electric vehicle stocks, the valuations still beggar belief.
Tesla (TSLA) may have finally been outdone. Yet, not quite in the way one might have expected.
Tesla has long confounded short-sellers that have raised red flags over its soaring valuation. Even for a technology company, as many bulls regard it, the valuation at about 358-times earnings is extremely elevated. For reference, that is over three times the ratio sported by hyper growth stocks like Nvidia (NVDA) .
For automakers the difference is even starker. General Motors (GM) trades at eight-times earnings, Toyota (TM) touts a ratio of nine, and Volkswagen trades at a paltry five times earnings. Even after a major run amidst its entry into chip-making, even Ford touts a price to earnings ratio of 27.
But it is not Tesla that is causing markets to apparently take a closer look at elevated valuations. Instead, it appears that newer entrants like Lucid Motors (LCID) and Rivian (RIVN) chasing its current EV market crown are causing the commotion and raising questions about the sector's sustainability. In fact, many are wondering if there are echoes of previous market bubbles.
"The recent experience in EVs (is like bubbles) in cannabis stocks and the current experience in cryptocurrencies and crypto-related stocks," Creighton University professor of finance Robert Johnson told Real Money. "The pure play EV manufacturers all appear to be overvalued."
Still, as Tesla has shown, certain stocks can continue to carry lofty valuations if they maintain positive sentiment and deliver enough on their ambitious aims to satisfy analysts and investors. As such, each stock is worthy of review in its own right.
In this respect, Lucid Motors is the longest in the tooth among new entrants, going public via a SPAC -- special purpose acquisition company -- deal in July. Since that point, the stock has soared to surpass numerous traditional automakers and tout a valuation of over $80 billion.
That has all come to pass despite sales of less than 600 vehicles in 2021 and an expectation of 20,000 deliveries in 2022. In total, management expects to reap about $2.2 billion in revenue over the next year. For comparison, Ford sold 4.2 million vehicles in 2020, raking in $127 billion in revenue.
While the current trends in EV uptake certainly warrant a premium and the cars are no doubt stylish, the comparison in context is startling.
"The current share price values the company just shy of $100 billion, which is approximately $2 billion per unit delivered so far," Morgan Stanley analyst Adam Jonas wrote in a recent note to clients. "While the EV [total addressable market] is vast, we believe the market is pricing in extraordinarily high probabilities of success and/or very low levels of risk."
He placed a $16 price target on the stock, projecting it to fall by nearly 70%.
Rivian's Rocket Off the Blocks
But Lucid's lift-off pales in comparison to Rivian's roaring start after its Nov. 10 IPO.
While its projected IPO pricing of $78 per share already raised eyebrows, it has since roared to almost $140 per share and a valuation of over $110 billion. Clearly the market is excited about the automaker. But this spectacular rise comes before the company has recognized even one dollar in revenue.
To be sure, there are some guaranteed future revenues baked into the Rivian story.
Amazon (AMZN) is the biggest anchor to the current bullishness. The Seattle-based tech giant is the firm's largest customer and investor, carrying a 20% stake in the company and has already ordered 100,000 delivery vans. Additionally, Ford is a major backer with about a 12% stake in the automaker.
This strategic partnership marks another key milestone in our drive to accelerate the transition to sustainable mobility," Rivian CEO RJ Scaringe said of the partnership. "Ford has a long-standing commitment to sustainability, with Bill Ford being one of the industry's earliest advocates, and we are excited to use our technology to get more electric vehicles on the road."
Clearly, these high profile partnerships and billions poured in from the likes of BlackRock (BLK) have emboldened those bullish on the EV transition. In some respect, that appears to be undergirding the bullish sentiment that only faltered briefly on Thursday before roaring back to close the week.
Still, no revenue has yet been recognized and much of the scale that the company projects to seize upon in the future remains merely a promise from management. That dynamic offers little, if any, margin of safety to investors not keen on essentially just speculating.
At the very least, the post-IPO glow will need to dissipate.
"Short-term valuation of IPOs are almost never justified in the long run. Paying for lottery behavior in stocks can carry a large cost, similar to playing an actual lottery," Garrett Desimone head quant at OptionMetrics told Real Money. "Therefore, in the longer term we are likely to see some strong mean reversion (return to reasonable valuation)."
Determining what that reasonable valuation is, now that is another question entirely.
Lessons From Dot-Com
Whether this is truly a bubble or just a trend getting out ahead of itself is an argument that can certainly be made. Given the valuations as they are, however, there is reason to tread carefully as speculation abounds.
In comparing the current environment, there are good lessons to be drawn from prior bubbles that contain corollaries to the current EV trend. Namely, just because a trend is a winner, not every stock in the sector will be as well.
"When any new sector takes off like the dot-com era, cannabis, crypto, there are the renegade disruptors that continue to wow investors with great innovation, and then there are the followers that will participate in the sector run," SOL Global Investments CEO Andy DeFrancesco told Real Money. "Some of those may get lucky while others will fizzle out and then there are the tier threes, ones that common sense will later show shouldn't have ever been funded and were doomed from the beginning."
On this point, SOL Investments' DeFrancesco considered that many older automakers not within the pure-play EV vertical as undervalued players at present.
"In the U.S., Ford and GM are much farther advanced than they are getting credit for and part of the reason is they are not communicating their EV efforts well enough."
"I believe a number of the automakers are definitely trading at a big discount to the trend, especially those heavily involved in motorsports where R&D and performance are at the forefront," he explained. "In the U.S., Ford and GM are much farther advanced than they are getting credit for and part of the reason is they are not communicating their EV efforts well enough."
DeFrancesco added that German automakers like VW and BMW and Japanese leaders like Honda and Toyota are in similar situations. At the very least, these legacy automakers have a proven track record of not only revenue, but profits to fall back upon.
Finally, there are emergent threats still out there to EV stocks that appear to not figure into current valuations. This should be fresh in the mind of the sector's investors as Apple's (AAPL) mere hinting at strides in autonomous driving took a bite out of each stock. Given the money poured into the space by so many firms with balance sheets akin to Apple's, that action might not turn out to be much of an anomaly.
Investors should plan accordingly.