What investors can learn from all the transactions of Tesla and Rivian

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Rivian’s stock price has been under pressure, but with a market value of more than $100 billion, which is larger than General Motors and Ford, it is hard to say that this upstart electric car is not a major success. Recently, the buying and selling of electric car stocks has been intense, from all the fuss about Elon Musk’s sale of Tesla shares to the former Tesla executive Peter Rowlinson’s Lucid Group, which went public earlier this year and is now valued at more than 800 100 million dollars, only about the same size as Detroit’s backbone team.

After President Joe Biden reappointed Jerome Powell to lead the Fed, the stock market faced a new test, leading to calls for investors to reinvest in value stocks and stay away from the hottest growth stock, Tesla’s Competitors have been giving back some benefits. Is there a bubble in electric car stocks?

CNBC recently spoke with Nick Colas, the co-founder of DataTrek Research and a former Wall Street auto industry analyst, on the situation in the field of electric vehicles.

Rivian and what caused the market bubble

According to Colas, Rivian’s valuation is very high. “This is inevitable. Whenever you talk about a company that has not sold any products and is valued at $100 billion, it is a huge valuation, but not necessarily a bubble,” he said.

Colas pointed out in a recent research report that until the beginning of 2020, Tesla’s own market value will not exceed $80 billion, and by then, it will produce 100,000 cars per quarter. Rivian has just started shipping its first customer vehicles.

On Wednesday, November 10, 2021, the Rivian R1T electric pickup truck will be listed off the New York NASDAQ market website.

Soldier | Bloomberg | Getty Images

The recent investor interest in electric car stocks and the rise in their valuations reflect one of the factors that caused the bubble: the imbalance between supply and demand for specific investment desires. When too much capital is invested in specific areas where there is a shortage of supply, a market bubble will form. In general, Coke is not worried about a bubble in the stock market soon, because market liquidity is still high, and household savings will continue to pursue market gains. But in the long-term electric car story, investors are actually chasing the few available names.

“Investors are looking for any opportunities that may play a role in the field of self-driving cars and electric vehicles, but there is a real lack of opportunities. This is why Tesla or Rivian are valued so high. Because there is not enough electric vehicle inventory,” Ke Russ said. “You have to provide the market with what it wants, otherwise it will create a bubble to a certain extent.”

Why investors can’t ignore electric vehicles

However, Coke is not ready to call it a bubble in electric cars. He said that the entire ecosystem of electric vehicles is exactly the same as the auto industry a century ago. It was very fragmented from the beginning, and then it took 80 years to become the Big Three. “In electric vehicles, it may take eight years,” he said.

Rivian, valued at US$100 billion, is a company that institutional investors cannot ignore.

“They saw what happened at Tesla and knew what would happen in this field,” he said.

With a market value of $100 billion, every institutional investor in the United States and around the world must take Rivian seriously. If they already own Tesla, investors need to decide whether to keep all Teslas or sell some and buy some Rivian, “just because it may not be Tesla but a company worth 50 trillion yuan. In the case, this is a five-bag,” Colas said.

Colas wrote in a recent report to clients: “In the past few years, we have conducted enough IPOs to understand that some investors will recycle when new companies go public, selling the’old’ name and using the’new’ name. Instead.” “Tesla has been the only’real’ electric car company in the U.S. stock market for many years. Now it is competing for marginal investors.”

Electric car stocks are not like bubbles like options

Colas said that Rivian is a hot stock with great volatility and will continue to fluctuate because the trading of electric car stocks is more like stock options than underlying stocks.

“Compared with stocks, this is a long-term option,” Colas said. “This is a choice for Rivian to achieve great success in the field of electric vehicles. Tesla did the same early in its history, a choice for the potential future.”

Therefore, Rivian’s recent volatility will be repeated for reasons other than the value growth cycle triggered by the Federal Reserve. Investors should remember that the volatility of options is always greater than that of the underlying stocks, and the volatility will follow the market’s opportunities. The degree of discount varies very successfully.

The place of GM and Ford in the electric vehicle equation

Considering the volatility of electric vehicles, investors should probably trade on both sides of the transaction. Some upstart risk exposures, including Telsa and Rivian, as well as the footholds of traditional participants, “not necessarily because they will win this space. But they do have the cornerstone that allows them to win,” Colas said.

What the Ford CEO said last week when he announced that his joint development of electric vehicles with Rivian would be cancelled (it is still an investor in the company). Ford CEO Jim Farley cited the automaker’s “increasing confidence” in “winning in the electric field” as a reason to end the cooperation.

However, the current market valuation of pure electric vehicles is higher than that of Ford or General Motors, indicating that long-term risks exist for incumbent automakers.

“Traditional automakers face some incredible challenges that we have never seen before, which makes the invasion of Japanese and South Korean automakers insignificant by comparison,” Kolas said. “So far, they have resolved major changes in technology by manufacturing electric vehicles in-house and merging companies.”

He doesn’t think this method is an advantage.

At present, the market’s valuation of Tesla, Rivian and Lucid Group relative to Detroit is conveying a message to investors that “the combination of the old internal combustion engine business and the electric vehicle business is not a good investment theme,” Russ said.

The key factor will be the extent to which General Motors and Ford may eventually spin off the electric vehicle business, which provides a potentially compelling reason for holding shares.

“These two themes are not related to each other. Breaking up is a possibility and a reason why you might want to own these stocks,” he said.

But he has no confidence in whether Ford or General Motors will take this action, even if it can be proved to be the right approach.

“General Motors and Ford Motors still have time. But as for the dramatic corporate transformations that reflect the survival challenges they face… we didn’t hold our breath,” Kolas wrote in a recent research report.

Cost of capital and the battle for electric vehicles

If General Motors and Ford stick to their current corporate structure, Colas believes that there is almost no advantage, only one obvious disadvantage: their cost of capital.

For Ford and General Motors, both of which have a market capitalization of less than US$100 billion, this figure is much higher than Tesla’s US$1 trillion. This is the sale of Tesla shares, which is more significant for competition in the electric car market than the recent Musk actions.

If Tesla needs $10 billion in capital, it can sell $10 billion in stock diluted 1% to existing shareholders. If General Motors or Ford did this, it would be diluted by about 10%.

“This is the huge difference in the cost of capital…. The combined cost of capital for General Motors and Ford is ridiculously high and unsustainable,” Colas said. “Because the electric vehicle industry is getting a huge tailwind from mass adoption, we will see a lot of new technologies come out, all these companies will have to invest a lot of money, and the positioning of large domestic automakers will not be as good as Rivian or Tesla. .”

Electric vehicles ultimately mean self-driving cars and the reshaping of global transportation. This will require companies to have considerable equity currency for mergers and acquisitions and strategic investments.

Colas wrote in a recent report: “Considering the current stock prices of General Motors and Ford, they will bring a knife in the shootout.”

This is an important reason why Colas regards independent valuation of the electric vehicle business as an advantage. “It’s not that Ford and General Motors can’t compete in electric vehicles or self-driving cars – they can,” he wrote in a recent report. “If they can own a stock that keeps pace with Tesla and (now) Apple, their chances will be greatly improved.”

The true king of cash and the car of the future

When it comes to using cash to invest in the future of cars, there is a reason for so much speculation around Apple’s interest. Colas said that since the company generates as much cash as Apple every quarter, investors do need to take Apple’s potential to enter the self-driving and electric car market seriously.

Apple won’t say anything, and Tim Cook’s recent comments about cars on Andrew Ross Sorkin are another bias. But last week, when Bloomberg reported that Apple’s car plans were accelerating and expected to debut in 2025, Apple did hit a record high.

“If it weren’t for the cash on the balance sheet, everyone would have to pay attention to Apple’s self-driving cars and electric cars,” Colas said. “Money does not solve all the problems in R&D, but it definitely helps solve the problems you know, so you have to take it seriously because they have more resources to do this than anyone else in the industry. “He said.

General Motors and Ford are financially sound today, and their internal combustion engine business generates cash flow. “But what will happen in the next recession? Or if more money is needed for technological breakthroughs in batteries?” Krass wrote in a recent note.

“Under these circumstances, the’old’ General Motors and Ford-a mixture of ICE and electric vehicle products, and stock valuations matching-are stuck… If it is not capital intensive, what would the automotive world be? Neither, so this is far from an academic issue.”

As Colas pointed out in a recent report on Apple and AV, the other side of the cash problem is that auto investment “has always been the grave of capital.”

But he believes that this is a large market that cannot be ignored, and the automotive approach of large technology companies is likely to be designed in accordance with the expectations of a new economic model that focuses on “transportation as a service” and does not necessarily require ownership. “This is a revenue model that any technology company will understand and accept.”


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