You might think that the IPO of electric-truck wunderkind Rivian Automotive Inc. — with its valuation soaring past $100 billion on zero revenue — perfectly captured the madness in autos in 2021. I disagree; it was actually Rivian’s first quarterly results, when the company said it would miss its production target by “a few hundred” vehicles. Ever alert to any ripples in its finely-tuned discounted cash flow model, the market promptly dinged the stock by 10%, or $9 billion, in a day.
This was a weird year for auto stocks. There’s the obvious stuff, such as Rivian’s market cap. And there’s always Tesla Inc. Elon Musk’s electrified juggernaut raced past $1 trillion in market cap and then fell back below it as the Time Person of the Year sold $11 billion or so of his own stake to pay taxes — after he conducted a Twitter poll and insulted several senators, naturally.
The not-so-obvious stuff concerns those dinosaurs making the gas-guzzlers we still mostly use, the likes of Ford Motor Co. and Toyota Motor Corp. Far from being shuffled into oblivion by Musk and the other upstarts, traditional automotive stocks also caught a bid.
Which leaves us with an interesting outcome: What was, just before the pandemic, a roughly $1 trillion global auto sector is now valued at almost $3 trillion.
This isn’t how things are supposed to play out in the great electric vehicle transition. The pure EV players are meant to gobble up an increasing share of the auto market and, alongside that, the stock market, displacing traditional cars and the companies that make them. Instead, with electric models at only about 7% of global auto sales, EV stocks have already taken half the market cap. More accurately, they’ve added on half the market cap. As analysts at Evercore ISI pointed out in a report in November, no one’s been displaced and the entire pool has roughly tripled in size.
Accounting for half of this expansion is Tesla’s staggering 12-fold increase in market cap. Other established EV makers have also jumped; China’s BYD Co. Ltd., a favorite of Warren Buffett, has surged by roughly $100 billion — almost sevenfold. And EV newcomers such as Rivian, Lucid Group Inc. and XPeng Inc. have added almost a quarter of a trillion dollars via IPOs.
Yet the old guard has played its part. Ford has more than doubled in value, while General Motors Co. is up by more than half. Toyota, which at the end of 2019 sported the largest market cap in the industry, has nearly doubled, while South Korea’s Hyundai Motor Co. and Kia Corp. have both jumped by at least 75%. The big European manufacturers haven’t enjoyed such stellar gains but are still up by about 20-40%.
Who knew disruption could be so generous to everyone involved?
There’s a positively Panglossian interpretation of all this that involves an old industry of gears and grease transforming into a digitized, electrified tech offshoot, where vehicles become smartphones on wheels. New, high-margin services will greatly add to the value of the humble motor car — and in turn to the value of all the companies that make, update and maybe even run them.
Tesla is exhibits A-Z of this worldview; bullish sell-side models tend to be larded with future, non-manufacturing businesses, such as robo-taxis. The rally in traditional auto stocks also owes something to this sort of hype, as even holdouts such as Toyota and Subaru Corp. have announced a big push into EVs, and GM and Ford have staked money in serious autonomous startups, Cruise LLC and Argo AI LLC, respectively.
This isn’t to dismiss the bullish narrative out of hand. The autos business is transforming for both technological and societal reasons. Electric, connected vehicles present a platform for genuinely new business lines, especially as autonomous capabilities are developed and battery-and-charging hardware and services advance. As ever, though, the scope and timing of such transformation is as predictable as, say, Elon Musk’s next tweet.
Moreover, it defies reason to assume that a sector that is still essentially in the business of selling roughly 95 million vehicles a year is suddenly worth three times what it was two years ago. Don’t forget there is also a huge parts and components sector not counted in that $3 trillion figure. For example, Chinese EV battery maker Contemporary Amperex Technology Ltd., or CATL, is now worth about $220 billion, up from only $30 billion two years ago. The energy transition is meant to scrap the billion or so internal combustion engines now running passenger vehicles, not to merely add new electric counterparts. But today’s market is pricing both for Tesla and other pure-EV players to sweep the board and for the incumbents to also do better.
The implication of this seeming contradiction is that the $3 trillion market cap must soon shrink. The big question is how, and relative valuations provide a possible answer. Despite their own rallies, the earnings multiples of traditional autos stocks remain paltry compared with those of the EV darlings. For example, Ford’s multiple of forecast earnings before interest, tax, depreciation and amortization has more than doubled since the end of 2019. Yet Tesla’s relative multiple is now actually slightly higher than it was back then.
Sure, maybe Ford will fail to transform itself, as have so many incumbents before. At a multiple of just five times Ebitda, though, it’s hardly priced for certain victory. And Ford has real strengths to tout. As with its peers, Ford harnessed some EV hype, even upping its snarky Twitter game (no attacks on senators as yet, though). But its rally also owes much to rather prosaic factors, not least its pricing power as recent demand has met with sparse supply. Ford also happens to make the number-one model in the U.S., the highly profitable F-150 truck, the electric version of which will almost certainly beat Tesla’s Cybertruck to market. To be worth five times Ebitda, Ford merely has to remain relevant.
The bigger risk in the sector lies with those stratospheric EV multiples. Tesla has defied its skeptics — this one included — but its 60-plus multiple still looks vulnerable because it rests implicitly on the company figuring out autonomous driving and such things, and soon. That may be something to watch in 2022 as, with the Cybertruck’s delay, Tesla may be tempted to amp up the robotaxi narrative, as it has in the past. Now, however, hitherto sanguine U.S. regulators seem to be taking a more careful look at the safety of Tesla’s driver-assistance technology. They even seem perturbed about Tesla’s feature allowing owners to play video games while they drive. Imagine that.
This doesn’t mean the new EV makers are doomed or that EVs are a passing fad. Far from it. Tesla’s undeniable success has been to push the rest of the industry toward electric and pave the way for a crop of lookalikes.
Indeed, one of the most fascinating open questions is how the incumbents will monetize some of the Muskian aura for themselves. Harley-Davidson Inc. is partially spinning off its electric bikes arm, LiveWire. Meanwhile, the recent ouster of the CEO of Cruise appears to have centered on a disagreement about whether and when GM, the majority-owner, should launch an IPO of the robotaxi startup. The contradiction embedded in the sector’s $3 trillion valuation should encourage moving sooner rather than later on this front.
Lurking in the background is the near-certainty that the incumbent automakers will hit roadblocks as they spend billions of dollars to transform themselves. The biggest potential obstacle is a mismatch between the batteries they have promised and the availability of the minerals required to make them. Benchmark Mineral Intelligence, a London-based data provider, lays out that issue here.
Finally, there’s always the risk that this $3 trillion honeypot will attract other disruptors. No year in autos is complete nowadays without some report that Apple Inc. is finally — finally — getting around to doing to cars what it did to cellphones. Its efforts thus far seem mainly to have benefited executive recruitment firms rather than revolutionized driving. But it would be foolish to discount Apple altogether. Quite apart from its formidable reputation for upending, and then owning, industries, it sports a market cap of — well, look at that — roughly $3 trillion.
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