Stock take: Will the markets continue to back start-ups like Rivian?
Nascent EV firms have been attaining astronomical valuations for several years now, led by Tesla. Will it carry on forever?
The sky-high valuations of companies such as Arrival, Canoo, Lucid, Nio and even Tesla are already deflating. Of 23 electric vehicle manufacturer stocks tracked by the Financial Times in a chart entitled Electric Bubble Watch, all are down on their peaks, some by more than 70% as we went to print (including Arrival, Faraday Future, Lordstown and Workhorse).
In one crazy moment this year, Tesla was valued at more than the next nine largest manufacturers while selling fewer vehicles than Isuzu.
If you organise global car makers based on their market capitalisation (the combined price of publicly and privately held stock), Tesla still comes way out in front of Toyota, with a $1 trillion (£750 billion) valuation in a snapshot taken on 7 December. But are we entering a phase where the stock valuation begins to align more closely with the physical realities of the start-ups?
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After Toyota comes Chinese EV and battery maker BYD, and then in sixth, ahead of General Motors, is electric car, truck and van maker Rivian, at $87bn (£65.7bn). California- based luxury EV maker Lucid is eighth, at $78bn (£58.9bn), just ahead of Ford at $76bn (£57.4bn). Chinese EV maker Nio is 14th, ahead of Honda. And Fisker, another Californian effort, ranks 36th, at $5.2bn (£3.9bn), ahead of Mazda.
The catalyst for this pricing was of course Tesla, which genuinely disrupted the global car market.
No one else making EVs is close, reckons Patrick Hummel, head of European car research for investment bank UBS.
“In 2021, Tesla has gapped away further from all others in terms of volume growth and [profit] margins, and its lead should be undisputed in 2022,” he wrote in an analyst’s note.
Tesla, however, has a long way to go before it will match the physical size of ‘legacy’ car makers. For example, in the third quarter this year, it delivered 627,572 vehicles and generated $31.3bn (£23.6bn) of revenue. Meanwhile, Ford delivered 2.84 million vehicles and brought in $91bn (£68.7bn). Tesla scored profits of $1.62bn (£1.2bn), which was impressive for a firm that has struggled to make money but still dwarfed by Ford’s $5.7bn ($4.3bn) profits over the same period.
The narrative driving stock prices for less established EV start-ups is essentially that they’re ‘the next Tesla’. But how valid are their claims?
Rivian is the EV maker that investors are betting most heavily will follow in Tesla’s footsteps. After a successful stock market flotation last November that raised about $13.5bn (£10.2bn), the Californian firm is now being promoted by financial analysts impressed by its successful roll-out of its first product, the R1T, last September.
“Rivian’s calibre as an organisation is made clear when considering it beat Tesla, Ford and GM to market with the industry’s first battery-electric pick-up truck (and an excellent one at that),” wrote analyst Ryan Brinkman for American investment bank JP Morgan in a research piece.
Rivian is cash-rich, capable and in possession of an order for 100,000 vans from retail giant Amazon, which is also a major shareholder. But it also has a mountain to climb as it follows Tesla’s lead to do much of the work itself – for example creating a network of chargers, rather than outsourcing.
Another analyst, George Gianarikas of investment bank Baird, started his coverage of Rivian’s stock by saying that this ‘vertical integration’ approach needs big sales to succeed and called on its founder and CEO to move fast.
“Clark Kent needs to emerge from the phone booth as Superman soon to scale Rivian and save the planet,” he wrote of bespectacled RJ Scaringe.
Rivian said in its stock prospectus published last October that it wants to move to enter Europe “in the near term”, followed by Asia, and to “localise production and supply chains in those regions”.
So far, though, its planned products are the 5537mm- long R1T pick-up, its 5131mm- long R1S SUV sibling and a van. Only the van would be likely to achieve anything other than niche status in Europe.
Rivian admitted this in its prospectus, saying that “initially and for the foreseeable future, we will depend on revenue generated from a limited number of models” and that “historically, automobile customers have come to expect a variety of vehicle models”.
Tesla also depends on a limited number of models, but at least the Model 3 saloon and Model Y crossover belong to market segments with global, rather than mainly US, appeal.
Lucid has more directly followed Tesla by launching with its Air luxury saloon first, but its valuation (reckoning it to be worth more than Ford, BMW, Ferrari and Stellantis) is looking shaky after it confirmed on 6 December that the American stock exchange regulator, the SEC, was investigating how it went public via a spac (special- purpose acquisition company).
The role of spacs is increasingly coming under scrutiny in the US, given how the listing process is far less rigorous than that of the traditional IPO (initial public offering), potentially allowing fraudulent claims and downplaying risks.
The spac process allowed the likes of Arrival, Canoo, Faraday Future, Lordstown and many others to jump from the fringes of the automotive industry into the consciousness of American investors looking for the next Tesla in one of the frothiest stock markets in history.
However, the disparity between revenue generated and market valuation has also caused many to bet against the start-ups using so-callled short-selling methods.
Short-sellers dug into some of the spac claims and found them wanting.
The various tricks of Trevor Milton, the former CEO of American start-up Nikola, were exposed by short-seller Hindenburg Research in 2020. Now the company is facing a $125m (£94.4m) fine from the SEC as it tries to move past the excesses of Milton. Its valuation of $3.8bn (£2.9bn) at the start of December was well down on its peak of $12.3bn (£9.3bn).
Other start-ups have also been targeted. Short-seller J Capital Research skewered two spacs for the price of one in the title of its report entitled ‘Move Over Lordstown: There’s a New EV Scam in Town’, which predicted that Faraday Future would never sell a single vehicle.
“Same nonsense, nothing more than a rehash of old news,” countered Faraday Future founder Yeuting Jia on Chinese social media.
Previously, Hindenburg Research had gone after Lordstown for misleading investors by falsely claiming customer reservations for its electric pick-up truck.
Lordstown CEO Steve Burns resigned last April amid the accusations.
Looming large over everyone’s claims are those of the traditional car makers, themselves betting billions on the shift to electric. But given the start-ups’ access to stock-market cash, their lack of ‘legacy’ factories and structures and their ability to be nimble could yet enable the best to follow Tesla and become household names in the future.
*Fisker on coping with the pressure *
You’ve gone public, there are financial forums dedicated to guessing whether you’re going to succeed or fail and you have short-sellers breathing down your neck, betting on the latter scenario. How do you keep the plan on track?
“There’s a lot of pressure on all the start-ups, particularly if you’ve gone public,” said Henrik Fisker, the founder of American EV-start up Fisker.
He unveiled the production version of the Ocean, an SUV pitched against the Tesla Model Y, at the Los Angeles motor show last November ahead of sales starting late 2022. Until then, the incredibly tough work of taking a concept to road- readiness continues. The trick is apparently to keep your head down and deliver.
“You’ve got to build a brand and you need to get the order reservations to make sure the suppliers feel good about your business model,” Fisker said.
Suppliers can make or break start-ups. “They’re evaluating to see if they want to work with you or not,” Fisker said. “They actively look at you to say: ‘Do we believe you’re going to make it’? If they don’t believe it, a lot of times they don’t want to work with you, or they charge you extra up front in case you go bankrupt.”
Fisker says his company has avoided that fate in part because of its relationship with Canadian super-supplier and contract manufacturer Magna, which will build the Ocean at its factory in Graz, Austria.
Fisker claimed to have taken 20,000 retail reservations for the Ocean as of 2 November.
Nick Gibbs