What investors can learn from all the Tesla, Rivian buying and selling
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Rivian shares were under severe pressure. However, with a market capitalization exceeding $100 billion and larger than GM, Ford and GM, it’s hard to argue that electric vehicle startup isn’t a success. Recently, EV stocks have seen a lot of buying and selling. has been intenseFrom all the controversy over Elon Musk’s sale of Tesla shares, to Peter Rawlinson’s Lucid Group which was publicized earlier in the year, it is worth more than $80 billion. This valuation is almost the same as that of the Detroit stalwarts.
The stock market is now facing a fresh test following the re-election of Jerome Powell as Federal Reserve Chairman. Market calls are expected to follow. investors are about to cycle back into value stocksTesla’s competition has been making some returns, away from those with the highest growth prospects ahead of pressures for interest rate increases. Is EV stock in bubble?
CNBC interviewed Nick Colas from DataTrek Research, cofounder, and former Wall Street automotive analyst about current events in the EV market.
Rivian, and why market bubbles happen
RivianColas says that’s value is very high. Colas stated, “There’s no escaping that. He said that if you’re talking about a company with a valuation of $100 billion and no product sales, it can be a big valuation but not necessarily a bubble.
TeslaColas pointed out that the company did not reach a market capitalization of $80 billion or more until 2020. By then it had produced 100,000 vehicles per quarter. Rivian just started shipping its first customers vehicles.
Rivian R1T, an electric pickup truck that was used during the company’s IPO, outside the Nasdaq MarketSite (New York), on Wednesday November 10, 2021.
Bing Guan | Bloomberg | Getty Images
One element that makes a bubble is an imbalance in supply and demand. This is why EV stocks have been attracting so much investor attention and are now valued at a high level. When too much money goes into an area with low supply, market bubbles may occur. Colas doesn’t worry about the stock markets popping soon. The liquidity remains high and household savings will keep pursuing market gains. The longer-term EV story is a tale of investors chasing down the best names.
Investors look for opportunities in autonomous cars and EVs, so Rivian or Tesla are highly sought after. Colas stated that there isn’t enough EV stock. You must provide what the market wants or bubbles will occur.
Why investors shouldn’t overlook EVs
Colas doesn’t think there is a bubble in electric vehicles. The whole ecosystem of EVs looks exactly like the automotive industry did a century back. They started off very fragmented, and it took them 80 years to get to the Big Three. He stated that EVs can take up to eight years.
Rivian at $100 billion is a company that no institutional investor could afford to overlook.
He stated, “They witnessed what happened to Tesla and now know what’s possible in this space.”
Rivian has a market capital of $100 billion, so every investor around the globe and in America must take Rivian very seriously. If they already own Tesla, investors must decide whether to sell their Tesla and purchase Rivian.
Colas explained in a note to clients that “We have done enough IPOs over time to understand some investors cycle through other companies as they go private, selling the old’ name and replacing with the?new. For years, Tesla was the only real EV investment in U.S equity markets. It now has competition from marginal investors.
Options-like stocks tend to be less volatile than EV stock.
Rivian stock is hot and volatile. It will be volatile for many years to come, Colas said. Because EV stocks behave more like stock options rather than underlying stocks, Colas stated.
Colas explained that it was a longer-dated stock option than a stock. It’s an option for Rivian to be highly successful with EVs. It was similar to Tesla earlier in its history. This is an option for the future.
Rivian’s recent volatility could also be repeated due to a Fed-induced growth to value cycle. Investors need not forget that options are more volatile that underlying stocks and that volatility can move with the market discounting its odds of being extremely successful.
Where Ford and GM fit into the EV equation
Due to volatility in EVs investors should probably play both the right and left sides. Colas stated that legacy players have “the building blocks” to allow them to win, although they don’t necessarily win.
Ford CEO Ford said this last week, when the company announced a new deal. jointly develop an EV with Rivian was being scrappedThe company still has an investor. Ford CEO Jim Farley cited Ford’s “growing confidence” in “winning in the electric area” as the reason to terminate the partnership.
However, the market value of EV pure-plays is higher than it was in today’s market. FordOr GMis displaying the risk of long-term failure in older automakers.
Colas explained that the legacy automakers have to face many challenges like we’ve never seen before. It makes South Korean or Japanese carmakers seem tiny in comparison. It is a major technological shift that they so far have addressed with building EVs in house and leaving all the other companies.
This is not something he views as an advantage.
Rivian is currently valuing Tesla at the moment. Lucid GroupColas explained that Detroit, relative to other cities, is sending investors the message that the “combination of the old combustion engines business and EV company tied up in that isn’t a great investment thesis.”
What degree GM/Ford might eventually spinoff EV businesses will determine the critical element. This is why it makes sense to retain shares.
He said that the two themes had nothing in common and that a breakup could be a possibility. This is one reason why you may want to have stocks.
However, he is not confident that Ford or GM will ever make that moveIt doesn’t matter if it can be made.
“GM and Ford still have some time. But as for a dramatic corporate remake that reflects the existential challenges they face … We’re not holding our breath,” Colas wrote in a recent research note.
The EV war and cost of capital
Colas believes that Ford and GM should keep their existing corporate structures. However, Colas does not see any advantages or disadvantages to Ford and GM.
Ford and GM have much lower market capitals than Tesla, with $1 trillion. The Tesla stock sale is more important than any Musk actions for the EV market.
Tesla could sell $10billion of stock at 1% to current shareholders, if they needed $10billion in capital. This is roughly the same as GM and Ford doing it.
That’s the huge difference in capital cost. Colas explained that GM and Ford have a combined capital cost of over $1 trillion, which is prohibitively high and not sustainable. We will be seeing a lot more new technology as soon as the EV market gets a huge tailwind due to mass adoption. All of these companies will need to invest a lot and domestic automakers won’t be as well positioned than Rivian and Tesla.
The future of electric vehicles is autonomous vehicles, and the reshaping global transportation. That will require companies to have considerable equity currency for M&A and strategic investments.
Colas said in a recent memo that, “With where GM’s and Fords stock prices are currently sitting,”
Colas regards this as a major reason for valuing the EV company separately. “It is not that Ford and GM can’t compete in EVs or AVs – they can,” he wrote in a recent note. “It is that their chances improve materially if they can have an equity currency that goes toe–to–toe with Tesla and (now) Apple.”
The car of the future and real cash king
Apple is the most talked about company when it comes cash. Colas states that investors should be cautious about Apple’s possible entry to the electric and autonomous vehicle markets if a company is generating so much cash quarter after quarter.
Apple isn’t going to say much, and Tim Cook’s latest comment on cars was another deflective response when Andrew Ross Sorkin asked about it at the Dealbook Conference. Apple’s last week reached an all-time record. Bloomberg reported that Apple’s car plans are acceleratingExpected debut by 2025
Colas stated that everyone should pay close attention to Apple’s autonomous cars and electric vehicles, if only for the cash it has on its balance sheet. “Money doesn’t solve every problem in R&D, but it certainly helps with the ones you know about and so you have to take it seriously if only because they have the resources to do it more than anyone else in the business,” he said.
GM and Ford have a strong financial position today. They generate cash flow through their internal combustion engine operations. What happens in the next downturn? Oder if there are technological advances in batteries that require a lot of capital. Colas made this comment in a note.
“In those scenarios, ‘old’ GM and Ford – with a mix of ICE and EV products and a stock valuation to match – are stuck. .. “The auto industry is capital-intensive and nothing but a highly capitalized one. This is not an academic problem.”
One side of the cash problem is investing in autos. This was noted in Colas’ recent Apple and AVs note. “has historically been a graveyard for capital.”
However, he claims it is too vast a market to ignore. Therefore the new approach to autos coming from large tech companies may be based on the assumption of “transportation as service,” and not necessarily ownership. This is a model that any tech company can understand and accept.
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