“The higher they go, the harder they fall”. Starting from this simple concept explained by the father of value investing, Benjamin Graham, in his masterpiece “The Intelligent Investor” when relating to “Bull market baloney”, we can start analyzing the current situation of the Electric Vehicles market, which has witnessed astonishing results in 2020 and keeps beating records every day.
But first, let’s go back to the end of 2019 before the pandemic and the following market crash in March 2020 took place. At the time, the world’s biggest EV manufacturer, Tesla, was selling at a price ranged between 80-90 dollars a share, while posting a total net loss for 2019 of 775 million dollars. Losses have never been a big deal for growth stocks like Tesla, which investors believe will generate big profits in the future, thanks to its technology that will probably change the car industry forever (a sector that basically has not changed in decades).
But a stock, like any asset, isn’t worth buying at any price, no matter how appealing the company’s technology might seem. In fact, since the profits that companies can earn are finite, the price that investors should be willing to pay for stocks must also be finite. What happened in the following months, and is still happening to this day, is just unbelievable. Tesla’s stock price went from approximately 85 dollars in March, to 880 dollars today (10/01/2021), which means a 935% increase in 9 months and a current market capitalization of 834 billion dollars.
So, the logical question is: What happened in these nine months? If we just look at the stock price it seems like Tesla has the monopoly of the global car industry since it is worth more than Volkswagen, Daimler, General Motors, FCA and Toyota combined. The problem is… Reality. Despite massive growth in EV sales in the last years, electric vehicles currently account for only 2.2% of the global vehicle market share. Also, Tesla hasn’t turned a profit for years until January 2020 and from a financial point of view has a P/E ratio of 677x, anything above 20/25x should be considered dangerous, even for a growth stock.
Recently, at a press conference in his role as chairman of the Japan Automobile Manufacturers Association, Akio Toyoda, Toyota’s president, said that “there’s too much hype surrounding electric vehicles” and pointed out that if all cars in Japan were electric, the country would be facing electricity shortages, while the infrastructure for a 100-percent EV fleet would cost the equivalent of up to US$ 358 billion just for Japan. The future of a dominant EV market over traditional engines is getting closer but there is still a long way to go and huge investments will be needed. Also, Toyota will put more than 10 electric models on the world markets in 2020, planning to “accelerate the popularization of battery electric vehicles”.
So, Tesla isn’t the only player in the EV market, with traditional firms developing their own electricity-powered models too (without being extremely overvalued). But there are also other new companies like Tesla that are part of the bubble, the most famous one probably being the Chinese manufacturer NIO, whose stock price has seen a 1495% increase in a year without ever making a profit (and still losing billions of dollars).
In the end, there are some similarities with the dotcom bubble in the early 2000s. People thought that the internet was going to be the future, and they were right, but they did not know the time it would have taken and were excessively optimistic about any company that had anything to do with the internet. Right now, the same is true for electric vehicles; nearly everybody agrees that in 15/20 years from now electric engines will be dominating the market, but current stock market values are crazy high, not sustainable, and investing in these companies at these prices cannot be the result of an accurate study of the company’s financials.