(Bloomberg Opinion) -- The chief executive officer of Volkswagen AG, Herbert Diess, has predicted that within five to 10 years the world’s most valuable company will be a carmaker. Given how much investors have been bidding up the shares of Tesla Inc. and other electric vehicle stocks, it might happen sooner.
Tesla’s market value soared past $540 billion this week — equivalent to 250 times its expected earnings this year — meaning it’s now the world’s 10th-most valuable listed business, according to Bloomberg data. A trio of New York-listed Chinese electric-vehicle groups — Nio Inc., XPeng Inc. and Li Auto Inc. — are worth a combined $154 billion. None of the three is profitable and together they delivered fewer than 30,000 vehicles during the most recent quarter, just over 1% of Volkswagen’s car sales volumes.
Arrival Ltd., a U.K.-based electric-bus and van startup that’s poised to go public by merging with a special purpose acquisition company, is valued at almost $16 billion after the SPAC’s shares more than doubled in a week. It won’t start producing vehicles until late next year.(1)
The electric revolution is real and the shift away from combustion engines is accelerating. From a climate perspective, it’s great that investors are allocating capital like this. Still, valuations look mighty bubbly. The potential for disappointment is massive, particularly for the newest crop of EV makers that are yet to generate meaningful revenue.
Like all financial bubbles, this one is driven by dreams of enormous wealth. Elon Musk has overtaken Bill Gates as the world’s second-richest person. Scottish investment manager Baillie Gifford & Co., an early Musk backer, recently cashed out billions of dollars in Tesla stock but retains a 3.7% holding worth about $20 billion. Baillie Gifford has more than one horse in the EV race: Its Nio stake is worth almost $6 billion. The Chinese company’s U.S-listed shares have surged 1,235% this year.
Nio’s recent history shows the perils of electric-vehicle stocks. It warned in March of substantial doubt in its ability to continue as a going concern, having burned through $4 billion of cash in three years. It survived thanks to a local government bailout. Tesla has been on the cusp of bankruptcy at least twice since 2003.
Those now joining the electric race claim to have learned lessons from these near-death struggles but there’s little to suggest their fates will be any less volatile.
Competition is intense and while electric motors are simpler to build than combustion engines, developing a vehicle that’s safe, reliable and exciting is incredibly difficult. Incumbent giants such as Volkswagen and General Motors Co. are much better capitalized and they’ve far more experience managing supply chains and building brands. After a slow start, they’ve gone “all-in” on EVs. They won’t be shoved aside easily.
Several factors have driven electric-vehicle stocks to these giddy heights. The U.S. Federal Reserve has stoked a speculative frenzy by cutting interest rates to zero, and bored millennials trading stocks at home on Robinhood have caught the EV bug. Electric-vehicle companies know how to market themselves to this crowd: Workhorse Group Inc. says its delivery vans can be paired with a drone, while XPeng emphasizes its autonomous-driving capabilities. ElectraMeccanica Vehicles Corp.’s “Solo” model has just three wheels.
Then there’s 2020’s hottest financial fad: SPACs. Many have merged with electric-vehicle groups, and one peculiarity of these deals is that the companies are allowed to publish detailed multi-year financial forecasts, unlike in a regular initial public offering. These projections are often extremely bullish. Like Arrival, Fisker Inc. — an asset-light electric-auto business whose shares have soared — is yet to commence commercial sales. Even Musk is worried about SPACs, though he hasn’t said which ones.
These new companies claim to have a solution for the manufacturing difficulties and massive capital outlays that almost sank Tesla. Drawing a comparison with the way Apple Inc. outsources phone production to Foxconn Technology Group, Fisker plans to subcontract manufacturing of its Ocean SUV to Canadian auto-parts supplier Magna International Inc. Electric- and hydrogen-truck maker Nikola Corp. is pursuing a similar strategy with partners GM and CNH Industrial NV.
Others are taking a different approach. Electric-pickup startup Lordstown Motors Corp. acquired a factory from GM and has licensed technology from Workhorse to speed its market entry. Not to be outdone, Arrival claims to have reinvented the car assembly line. It plans to construct smaller, cheaper “microfactories” situated closer to where products are sold. Greater automation will reduce the need for human labor, it says.
However you produce vehicles, though, there’s plenty to trip you up. More than a third of Workhorse’s factory staff have had to down tools because of suspected coronavirus infections. Li Auto recalled all 10,000 electric SUVs produced before June, after it found a potential suspension problem. Workhorse and XPeng both warned recently of battery supply bottlenecks.
A big test for wannabe Teslas will come when they’ve burned though their cash and need to ask equity and debt investors for more, as Tesla and Nio have done repeatedly. ElectraMeccanica warned in its latest accounts that its “ability to continue as a going concern will depend on our continued ability to raise capital on acceptable terms.”
All of this may have short sellers licking their lips, but Tesla’s rise shows the danger of betting against the bubble. Nikola was the subject of a scathing report from Hindenburg Research that questioned its technology, and which forced the departure of its chairman. Yet its market capitalization now exceeds $11.5 billion.
Diess may be right about carmakers becoming the most valuable companies. It’s inevitable, however, that some won't make it.
(1) Basis of calculation: the transaction at $10 a share valued Arrival's equity at $6 billion. Shares of the CIIG Spac are now trading at $26.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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