We’re convinced that electric vehicles will eventually rule the road. A hundred years from now, the average citizen will wonder aloud when they think about how oil was used in the past… “You mean they actually burned that stuff!?,” exclaims Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.
Yet, that future is not here yet, and we doubt that the pace of adoption will be anything like the optimists anticipate. In the U.S., about 3% of vehicles sold last year were electric vehicles, and these were subsidized by government tax credits and other benefits.
We estimate the collective market value of all car markers globally is about $2.2 trillion. In the past four years, this total value has more than doubled, mostly due to the emergence of Tesla (TSLA), whose market value was only about $65 billion in late 2017, although gains in shares of other makers have helped.
We’re watching with wonder how Tesla is now a $1 trillion company and that Elon Musk, by himself, is worth more than all of ExxonMobil (XOM).
While its future is exceptionally bright, Tesla’s stock valuation already discounts most of its coming prosperity. It is already worth perhaps twice the entire remaining auto industry. Surely it can’t garner a 70% implied share of all future industry profits, which its stock price implies? Its valuation has matched and then exceeded its position on the innovation curve.
Where the rubber meets the road to us as investors is in the collective valuation of car companies. Worldwide annual vehicle sales, now running at about 80 million units a year, may increase at a 2% pace at best, to perhaps 94 million by 2030. The 2030 profit pool probably won’t be much larger than it is today, due to intense competition.
We don’t have any reasonable understanding, nor does anyone, of the profitability, in 2030, of EVs relative to gas-powered vehicles. And, the capital spending to develop, manufacture and improve EVs and other advanced technologies will be enormous, as previewed by a $35 billion commitment from General Motors (GM) over the next five years.
We continue to watch in amazement the values that the market puts on electric vehicle makers, with the most recent example of Rivian Automotive (RIVN), which was recently the #3 most valuable car company in the world.
Rivian has delivered 156 vehicles in its history and will probably lose $2 billion this year. This compares to Volkswagen (VWAGY) — the former #3 company -- which will likely earn $15 billion this year on the 6.5 million vehicles it has delivered so far this year, which includes 300,000 electric vehicles. VW, no slouch in the high-performance EV segment, has delivered almost 29,000 Porsche EVs.
Rivian has orders for about 55,000 vehicles from individuals and another 100,000 from 20% owner Amazon (AMZN). The company says it can produce 200,000 vehicles a year, if it expands its current facilities, by perhaps 2024. That’s a long time to wait for what may be an outdated vehicle, especially when it takes only a $1,000 fully-refundable deposit to hold a retail order.
EV companies such as Rivian and Tesla are essentially meme stocks that trade on sentiment rather than enduring value. GM and traditional car companies have strong if not exciting revenue growth and cash flows — clearly of no interest to meme traders.
Looking at valuations, Rivian recently traded at $720,000 per vehicle produced (based on its 200,000/year target), while Tesla trades at about $500,000/vehicle (based on $1.0 trillion market value and 2 million units/year). On the news that Hertz was ordering 100,000 Teslas, TSLA shares jumped 12%, adding roughly $120 billion of market value. Those incremental Hertz-Teslas were apparently worth $1.2 million per vehicle.
Dull giant Volkswagen trades at about $12,700/vehicle produced, assuming a recovery to its normal 11 million vehicle volume. General Motors is valued at about $11,500/vehicle, based on its $92 billion market cap and a normalized output of 8 million vehicles.
Is a Tesla in a few years really worth 43x a GM vehicle today? We certainly appreciate the reality of wider operating margins at Tesla (perhaps 25%) and the hope of wide margins at Rivian, as well as the absence of legacy pension and other liabilities, compared to margins of perhaps 10% at General Motors.
We also recognize the vast array of side hustles including battery production, insurance, fleet/ride-sharing, and other high-margin services that Tesla can provide, along with the cache of its brands. But we wonder if GM and VW really are that far behind in the EV transition and their ability to offer new services. Can the value gap be even reasonably justified? We think not.
But until the gravity of easy money and high speculation unravels, there likely won’t be much to pull the valuations together. And when they do eventually converge, it will be Tesla and Rivian becoming cheaper a lot more than it will be from GM becoming more valuable.
