When Will The EV Stock Bubble Pop?
By: Marc Guberti
Tags: Investing, Money, Tesla, Stock Market, Electric Car

When Will The EV Stock Bubble Pop?

Electric vehicle stocks have been among the biggest winners of 2020. Tesla and Nio, the two leaders in the space, are up 670% and 1,200% respectively.

While electric vehicles are certainly the future, many stocks in the space have gotten ahead of themselves. Nio has a higher market cap than GM even though GM sells more vehicles in a week than Nio has sold as a company…and GM does it profitably.

Workhorse is trading at a 3,270 P/S ratio that hinges on a USPS contract that still wouldn’t justify the valuation.

We also have multiple bad actors in the space such as Nikola Motors and Kandi assuming Hindenburg is 2-for-2 (they were spot on with Nikola Motors).

Combine the speculative nature of EV SPACs and heightening competition from traditional car companies, and there is a bubbly feeling in the air for EV stocks.

So…how long will it take before the bubble pops?

Right now, it’s easier for EVs like Nio and Tesla to continue producing rapid sales growth. Nio has sold close to 40,000 cars in 2020. It’s not unfeasible for Nio to sell 80,000 cars in 2021 (or more than that) as long as they can produce that many cars and market them.

GM is different.

If you look at the trend for GM’s sales in the United States, you can see rapid growth during the initial years followed by a stall going into the Great Recession.

GM sells millions of vehicles in the U.S. each year, but it’s not growing. Rather, GM is currently trying to maintain sales from the previous years.

I don’t see GM suddenly jumping up to 6 million car sales in 2021 and then 12 million car sales in 2022. I don’t see them then selling 24 million cars in 2023.

There’s a lot of competition in the space, and the bigger you get, the harder it is to double your sales and revenue each year.

For any growth stock, the narrative is essential. As long as Nio can continue to produce significant revenue growth (they’ve been reporting triple digit growth), the stock will continue to go up. The moment Nio reports lower growth (i.e. under 20% revenue growth), the stock will be in for a rude awakening.

This process can ironically speed up as these companies continue to grow (i.e. you can’t have triple digit growth forever) or as traditional car companies provide high quality EV alternatives.

As more companies embrace EVs, the valuations of Tesla, Nio, and others can fall more in line with traditional car companies.

Tesla is a few years ahead of the other major competitors, but that gap can be made up with the capital, resources, and talents the other car companies possess.

While EV companies are touted as different from traditional car companies, their margins aren’t.

Here are some of the profit margins of EV and traditional car companies:

TSLA: 1.97% profit margin

NIO: -56.26% profit margin

GM: 2.92% profit margin

F: -0.12% profit margin

TM: 5.50% profit margin (TM is the ticker symbol for Toyota)

Nio has been narrowing its losses, so the current -56.26% profit margin will get closer to a positive number in the following months. A profit margin approaching 0% will help with further momentum, but what happens when Nio has a positive profit margin that barely moves?

Despite being car companies that happen to produce EVs, Tesla and Nio are unfairly valued like they’re tech companies.

Tech companies get their lofty valuations in part because they command wider profit margins.

The Dotcom Bubble hurt every internet stock even though the internet has now become an essential part of our lives. EVs won’t become as essential as the internet, but they are the future. That doesn’t excuse the drastically overvalued stock prices of almost every EV stock in the market.

Can Nio jump up to $500 or Tesla jump up to $1,500? In this market, anything is possible as long as the growth narrative holds since valuations seem to be an afterthought for many EV investors. But I’d rather put my money into stocks that aren’t as risky for my taste.

And something has to give eventually.

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