What investors can learn from all the Tesla and Rivian buying and selling

Rivian stock has been under pressure, but with a market cap of more than $ 100 billion more than GM and Ford, it would be hard to say that the electric car upstart hasn’t been a big hit. Promotions for buying and selling electric vehicles have been intense lately due to all the hype surrounding Elon Musk’s sale of Tesla shares to former Tesla CEO Peter Rawlinson of the Lucid Group, which went public earlier this year and is now valued at more than $ 80 billion. about as big as Detroit’s stalwarts.

As the stock market faces a new test after President Joe Biden reappointed Jerome Powell as head of the Federal Reserve, which led to market calls for investors to return to value equities and ditch the fastest growing companies in the face of pressure from higher interest rates. Tesla’s competitors have returned some profits. Electric vehicle promotions in a bubble?

CNBC recently spoke with Nick Colas, co-founder of DataTrek Research and a former Wall Street auto industry analyst, about what’s happening in the EV space.

Rivian and what creates bubbles in the market

A Rivian R1T electric pickup truck during the company’s IPO outside the Nasdaq MarketSite in New York, Wednesday, November 10, 2021.

Bing Guan | Bloomberg | Getty Images

The recent investor interest in EV stocks and their rise in value reflects one element of what creates the bubble: the imbalance between supply of a particular investment desire and demand. Bubbles in the market can form when too much money is invested in a certain area where there is not enough supply. In general, Kolas is not worried that the stock market will find itself in a bubble that will burst anytime soon, because liquidity in the market remains high, as well as household savings, which will continue to strive for market profits. But in EV’s long-term history, there is the fact that investors are chasing the few names that are available to them.

“Investors are looking for every possible game in autonomous vehicles and electric vehicles, and there is a real lack of opportunity, which is why Tesla or Rivian are so highly regarded. Because there are not enough stocks of electric vehicles, ”said Kolas. “You have to provide the market with what it wants, otherwise it will create bubbles to some extent.”

Why Investors Can’t Ignore Electric Cars

Kolas, however, is not ready to call the bubbles of electric vehicles. He says the entire EV ecosystem is exactly what the automotive industry was a century ago, which was very fragmented at first and then took 80 years to descend into the big three. “In electric vehicles, it could be eight years,” he said.

And Rivian, valued at $ 100 billion, is a company that no institutional investor can afford to ignore.

“They saw what happened to Tesla and they know what could happen in this space,” he said.

With a market capitalization of $ 100 billion, every institutional investor in the US and around the world should take Rivian seriously. And if they already own Tesla, investors must decide to keep all of their Tesla or sell part and buy Rivian, “just in case it’s not Tesla, but a half-trillion company, in which case, that’s five bags,” Colas said.

“We’ve had enough IPOs over the years to know that some investors cycle through new companies when they go public, selling the ‘old’ name and replacing it with the ‘new’ one,” Colas wrote in a recent note to clients. “For years, Tesla has been the only ‘real’ EV game in the US stock markets. Now she has competition for a marginal investor. “

Electric vehicle stocks are less bubble-like than stock options.

Rivian is a hot stock, and it is very volatile and will remain volatile, says Colas, because EV stock trades more like stock options than underlying stocks.

“This is more of an outdated option than a stock,” said Kolas. “This is an option for Rivian to be very successful in EVs. Tesla was the same earlier in its history, an option for a potential future. “

As such, recent volatility in Rivian will repeat itself for reasons other than the Fed-driven cycle of value to value, and investors should remember that options are always more volatile than the underlying stocks and that volatility will change depending on how much the market is. reduces your chances of being very successful.

Where GM and Ford fit into the EV equation

Given the volatility of EVs, investors should probably play with both sides of the deal, with some reliance on upstarts like Telsa and Rivian and a reliance on old players, “not necessarily because they’re going to win space, but they have building blocks that can let them win, ”said Kolas.

This was announced last week by the CEO of Ford, announcing a deal to The joint development of the electric vehicle with Rivian has been canceled (she is still an investor in the company). Ford CEO Jim Farley cited “the automaker’s growing confidence that it will” benefit from the electric space “as a reason for the end of the partnership.

But the current market approach to pricing pure EVs higher than Ford or GM shows the long-term risk inherent in older automakers.

“Legacy carmakers are facing incredible challenges like we’ve never seen before, and by comparison, the invasion of Japanese and South Korean automakers looks negligible,” said Kolas. “This is a big change in technology that they’ve been looking at so far, building EVs in-house and leaving the companies together.”

He does not see this approach as an advantage.

Right now, the way the market compares Tesla, Rivian and Lucid Group to Detroit is sending a signal to investors that “combining the old internal combustion engine business and the related electric vehicle business is not a great investment thesis,” said Kolas. … said.

The deciding factor will be the extent to which GM and Ford can ultimately spin off EV production, and this represents one potentially compelling reason for holding the stock.

“These two topics have nothing to do with each other, and this gap is an opportunity and one of the reasons why you might want to own stock,” he said.

But he not sure if Ford or GM will ever take such a step, even if the deed can be done, it is true.

“GM and Ford still have time on their watches. But as for a dramatic corporate remake that reflects the existential challenges they face … We didn’t hold our breath, “Colas wrote in a recent research note.

The cost of capital and the battle of electric vehicles

If GM and Ford stick to their current corporate structures, Colas sees almost no advantage and one clear drawback: cost of capital.

For Ford and GM, which have a market cap below $ 100 billion, this is much higher than Tesla’s ($ 1 trillion). This sale of Tesla shares means much more to competition in the EV market than Musk’s recent moves.

If Tesla needs $ 10 billion in equity, it could sell $ 10 billion in 1% dilution to current shareholders. If GM or Ford did it, that’s about 10% thinning.

“That’s how big the difference in cost of capital is … GM and Ford’s total cost of capital is ridiculously high and volatile,” said Kolas. “Because the moment the EV industry gets a big tailwind from mass adoption, we will see a lot of new technologies emerge, and all of these companies will have to invest a ton, and the major domestic automakers will not be as well positioned as Rivian. or Tesla. “

Electric vehicles will ultimately involve autonomous vehicles and a redesign of the global transportation system. This will require companies to have significant capital for M&A deals and strategic investments.

“Given the current stock prices of GM and Ford, they will be using the penknife in the gunfight,” Colas wrote in a recent post.

This is a good reason why Kolas sees self-appraisal of the EV business as an advantage. “It’s not that Ford and GM can’t compete on EVs or AV – they can,” he wrote in a recent post. “The point is, their chances will improve significantly if they have a stock currency that keeps pace with Tesla and (now) Apple.”

The real money king and the machine of the future

When it comes to the cash to invest in the future of automobiles, there’s a reason so much speculation surrounds Apple’s interest. With the business generating as much cash as Apple quarter after quarter, Kolas said, investors need to be serious about Apple’s potential entry into the autonomous and electric vehicle market.

Apple won’t say anything, as Tim Cook’s latest comment on machines is another diversion when asked by Andrew Ross Sorkin at a recent Dealbook conference. But Apple hit a new all-time high last week when Bloomberg reported that Apple’s car production plans are accelerating and are expected to debut by 2025.

“Everyone should pay attention to Apple in the autonomous vehicle and electric vehicle space, if only for the reason that its cash is on the balance sheet,” said Colas. “Money doesn’t solve all problems in research and development, but it certainly does help with the ones you know about, and therefore you should take it seriously, if only because it has more resources to do it than anyone else- or someone else in this business, ”he said. …

GM and Ford are financially healthy today, generating cash flow from combustion engine operations. “But what happens during the next recession? Or will there be a technological breakthrough in batteries that will require much more capital? ” Kolas wrote in a recent note.

“In these scenarios, the ‘old’ GMs and Fords – with a mixture of ICE and EV products and corresponding stock pricing – are stuck … The automotive world is nothing if not deeply capital intensive, so this is far from an academic issue. … “

The flip side of the monetary problem, as noted in Colas’ recent post on Apple and AV, is that investing in cars “Has historically been the graveyard of capital.”

But he argues it’s too big a market to ignore, and the big tech companies’ approach to cars is likely designed with the expectation of a new economic model focused on transportation as a service, not necessarily requiring ownership. “This is a revenue model that every tech company understands and embraces.”

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