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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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How Big Can the Tesla Bubble Get?

Here’s one fact that somehow transcends logic: Tesla is worth five times more than GM and Ford—combined. The EV company, which for quite some time served as a laughing stock for conservative investors on the one hand and the favorite of short-sellers on the other, has now reported five consecutive quarterly profits. As such, its outlook is bright, with EV sales seen as picking up considerably.

It’s no wonder that other EV markets are eager to replicate its success.

The Wall Street Journal reported earlier this month on two EV startups that have gone public in recent months—each having almost no or no revenue. Another four no-revenue companies in the EV segment have plans to go public, with traders rushing to buy because EVs, according to most reports on the topic, are the next big thing.

There are already road maps to investing in the sector, and what these roadmaps are suggesting is that the future of these EV hopefuls is so far from certain that the hype may well be blowing a bubble that is ready to burst at the drop of a pin.

Electric car maker Fisker went public last week, with shares gaining 13 percent during its first day of trading. Like Nikola and Lordstown Motors, it did so through a merger with a blank check company—this is the new way startups are going public as they seek to do it as early as possible, taking advantage of the current surge in interest among traders in electric vehicles.

Fisker has a prototype of an electric SUV, the Ocean, which it plans to begin manufacturing in two years. The company recently closed a deal with Canadian Magna International to supply the car’s platform that it will produce at one of its European factories. The deal comes a similar deal—with Volkswagen­—fell through. And the stock of the company reacted strongly—and negatively—to that news.

The stock of another EV startup, Lordstown Motors, also debuted on the stock market last week with a strong gain. By the end of the week, the rally ended, and the company was down a cumulative 28.3 percent, according to a CNBC report. Lordstown Motors has plans to produce an electric pickup truck at its factory in Ohio, promoting it as the first fully electric truck for commercial fleets. And this may be the best decision made in the EV segment recently.

Tesla recently said that it was on track to start deliveries of its Model Y SUV next year. Ford and GM, meanwhile, have their own EV plans in the trucks and SUVs categories. GM recently showcased an electric Hummer, and Ford is about to release its Mustang Mach-3 by the end of this year. These are companies with a long track record in making cars and the means and resources to make more of them. This is the competition of startups such as Fisker and Nikola, but likely not Lordstown yet, because most EV makers target the passenger vehicle market. Related: Four OPEC+ Members Favor Extended Cuts

It is an already crowded market, but some believe there is space for more EV makers because of the outlook for the technology. 

“There is a clear and strong future market for electric vehicles (EVs) and all other elements which go into keeping them on the road, such as running the charging networks, batteries and maintenance,” Tim Perera, associate director at CIL Management Consultants, told Oilprice.

Yet big carmakers have the advantage over startups, according to Perera, as volume auto will always be an extremely competitive game.

“We have seen this with some big players, such as Dyson, unsuccessfully trying to establish themselves in the market. In the end, most big auto players have woken up to the potential (and more pertinently the risk to them) of EVs and have many advantages over start-ups: established sales and distribution channels, service networks, manufacturing experience and brand recognition.”

This could be while EV startup stocks are so volatile. According to Goldman Sachs, these stocks tend to record strong debuts but later underperform the wider market as some buyers of their stocks trade on the hype around these companies, and once this begins to subside, they pull out.

This is what happened to Nikola. The company that was often referred to as a challenger to Tesla made a strong market debut earlier this year and then, a few months later, the stock crashed following allegations that its flagship e-truck was much farther from hitting the market than the company had promised. Currently, the company is trading well below its peaks this year.

“Start-ups will need to adapt in order to succeed in this competitive ecosystem,” CIL Management Consultants’ Perera said. “Of course, there will be losers, but some could work. There are significant investor opportunities, but identifying these will require a clear view of the factors needed for success in the space and some appetite for risk. The key question investors should be asking themselves is, ‘How can you benefit from the excitement, market growth and investment without taking on too much risk or battles you won’t win?’

This is a tough question to answer, especially for the new generation of day traders who seem to care more about the amount of media attention a company is attracting rather than any quantifiable performance metrics.

“Good storytelling is an important component of being a good founder and entrepreneur - but it better not be the only component,” the founder of startup investor company Synapse Partners, Evangelos Simoudis, told Reuters earlier this month.

By Irina Slav for Oilprice.com

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Leave a comment
  • Pekka Lehtikoski on November 05 2020 said:
    "These roadmaps are suggesting is that the future of these EV hopefuls is so far from certain that the hype may well be blowing a bubble that is ready to burst at the drop of a pin." is a good way to put it:)

    Making a good electric car is not easy, years of innovation, development, testing, and refining. ASIC chips and batteries. Keeping the development within budget and manufacturing costs at check is a trick in itself. The hardest part is perhaps building the infrastructure. Tesla has accomplished this, it has an excellent product (S model is only which I have driven), for an acceptable price. Now it holds 80% of the US market share, despite losing federal tax subsidies. It did all this at a time when there was virtually no competition. Now it is a really hard market for a newcomer to enter: Expectations, price pressure, and infrastructure demands are high. I believe Tesla has all changes to succeed as a business.

    From an investment viewpoint, even the best thing may be too expensive. Tesla stock is so grossly overvalued that it seems inevitable that there is a major correction at some point. Some day, perhaps decades into the future, its stock may be worth what is paid for it today. There is much hype, and much investment money going around. Some of the startups are legitimate and may even succeed. Most will not. A skeptical person may assume that some of the startups are set up just to collect investor's money, not actually to make a real product (Nikola?).
  • Ronald McKinney on November 05 2020 said:
    The Model Y has been out for a while now. Is the author thinking about the Cybertruck? Discussing Tesla without mentioning their power business is a mistake. They are not just a car manufacturer.

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