Market manias always begin with a great story, and right now there is no greater story than the one about how electric vehicles are poised to transform the auto industry.
The narrative is thrilling in its implications for share prices. However, it depends on the willingness of investors to overlook gaps in the plot. Taken as a whole, it raises more questions than it answers.
Among the questions is the perpetual uncertainty around how to value Tesla Inc. Its fan base appears to assume Elon Musk’s company will not only dominate EV sales from here to eternity but also diversify into adjoining industries. Only by assuming continued success on all those fronts can you justify the automaker’s towering US$1.1-trillion price tag.
But is Tesla’s endless dominance a sure thing? Maybe not. To hedge their bets, investors are also betting big on Tesla’s future rivals – upstart EV manufacturers such as Rivian Automotive Inc. and Lucid Group Inc., both of which went public in recent months.
The two new automakers are just beginning to produce vehicles but are already valued at levels equivalent to the industry’s established giants. Rivian’s lofty US$96-billion market capitalization (its share count multiplied by its share price) and Lucid’s equally giddy US$85-billion price tag imply the market puts them on a par with General Motors Co. (US$87-billion) and Ford Motor Co. (US$79-billion).
The valuations on the new entrants might be plausible if you assume the EV whiz kids are poised to swiftly displace the industry’s old guard. Oddly enough, though, both GM and Ford are also enjoying a burst of popularity.
The share prices of the Detroit-based duo have risen well above prepandemic levels and both have earned thumbs up from the likes of Citigroup and Credit Suisse. To make things even odder, one factor in their recent rise is analysts’ growing confidence that the old-line buggy makers will be able to compete in EVs.
To sum up: The market’s position is that the emerging EV world will be like the fictional Lake Wobegon, where every child is above average. In this wonderful world, everyone will win, no one will lose.
This does not seem likely. The central theme in the auto industry over the past two decades has been stagnation. In both Canada and the United States, unit sales of new vehicles have bobbed up and down in line with the economy but have shown little sustainable growth over the long haul.
Bullish analysts think the near future may feature a return to single-digit growth rates. Citigroup, for instance, sees auto sales in the U.S. rising from about 17 million vehicles in 2021 to about 19 million in 2023 because of pent-up demand.
But question marks surround even that moderate growth forecast. The annual miles driven per person in the U.S. began to level off around 2000. Twenty years later, the figure has barely budged. It is not clear why a shift to electric vehicles would fundamentally alter this trend.
In a slow-growth environment, automakers will be able to expand quickly only by displacing someone else. But at the moment, the market sees only winners.
Tesla is the biggest beneficiary of this euphoria. It is now worth as much as the next 10 biggest automakers combined.
To be sure, there are reasons for Tesla’s lofty valuation. The company has put skeptics and short-sellers to shame by defying their gloomy forecasts and actually producing a profit. However, that doesn’t imply its current price is reasonable.
Aswath Damodaran, a professor of finance at New York University and noted authority on valuation, ran the numbers early this month. Even with upbeat assumptions, the company is only worth about US$571 per share, he calculated. That is slightly more than half its current price.
Meanwhile, putting a value on Rivian and Lucid is an exercise in conjecture, because both have yet to generate meaningful revenue. This has not prevented analysts from pencilling in aggressive forecasts. Lucid’s sales, for instance, are supposed to rocket from essentially zero to about US$2-billion next year.
To be fair, putting a high target price on GM and Ford also involves a heavy dose of positive thinking. Maybe the old-line giants will prove to be fierce competitors in the EV space, but, if so, why have they been so lacklustre at it so far?
For investors, now may be a fine time to practise benign neglect. The history of other technological transitions shows there are often bumps along the way. Think of Microsoft’s fall from grace in the early 2000s or Google’s slide during the financial crisis. The best time to bet on EVs will be when their story looks less appealing than it does now.
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