Market Thinking

making sense of the narrative

Upcoming (electric)car crash

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The Wall Street habit of making up absurd valuations for Tech stocks on IPO has succeeded in the digital space largely because the unit cost of production in digital is approaching zero and the potential scale effects are huge. However, the blend of Tech and old manufacturing as represented in the electric car space is fast approaching a King’s New Clothes moment as the newcomers are now competing against vastly experienced manufacturing and distribution rivals who trade on multiples of 5x earnings and 0.5x book.

During the summer an update on an ‘old’ story almost sneaked by. The Tesla competitor Rivian, a startup backed by both Amazon and Ford, which we discussed at the end of 2019 (What Tesla should have done) raised $2.7bn of debt. The valuation at the time appeared to be the standard Wall Street make-it-up-as-you-go-along multiple of 10x, ie $27.6bn according to Bloomberg, but then someone must have spotted that, having raised a total of $10.5bn, it was actually time for an IPO on a valuation of $80bn! Naturally the company hasn’t yet delivered any actual cars, although Ford (Market Cap a mere $51bn) did book itself a near $1bn profit on its stake. As noted in August, ‘dieselgate’ has been a game changer for electric vehicles in that all the major manufacturers have switched to an electric offering and indeed many will sell as loss leaders to manage the overall emissions of their fleet offering. This makes it very difficult for a new entrant with no manufacturing experience to break into the market in any scale (a point Sir James Dyson made when he quit the race). Reviews of the Rivian are highly enthusiastic and as we noted in 2019 suggest that the ludicrous Tesla Cyber Truck will be Elon’s Edsel at best, if it ever sees production that is. (Although if, like Henry Ford with the Edsel he is going to name it after his latest son it might be called the Tesla X Æ A-Xii).

Rivian might see off the Cyber Truck, but not an electric P150

Indeed we would not be surprised if on a 5 year view Tesla give up making cars altogether and concentrate on batteries and power distribution. However, this does not mean Rivian has a spot to move into, for the existing manufacturers are crowding into the space. In particular, the window between the Rivian’s release – originally scheduled for 2020 but now next year – and the release of the all-electric pickups from GM and, of course, investor and soon to be rival, Ford is narrowing rapidly. If the sharp suits on Wall Street do manage to persuade retail investors (and doubtless ESG funds) to buy into a Rivian IPO, they would do well to watch what Ford do with their stake. Certainly, if it were me, I would sell my stake and then use some of the billions in booked profits to crush the new guys in the after-market with a heavily discounted and dealer supported new electric P150 pickup.

There’s a world of difference between making money shifting bits of paper between groups of leveraged ‘investors’ on the way to an IPO cash-out and actually making real things like cars, electric or otherwise. The reality is that Rivian should not be compared to Tesla for valuation, nor indeed to Chinese rivals like BYD or BAIC, but to its actual US rivals GM and Ford, both of whom trade on around 0.5 x sales. On that basis, the Wall Street plan for an $80bn IPO would imply $160bn of sales for Rivian’s electric trucks, which is approximately 10x the industry estimate for total US electric truck sales by 2030. Put another way, even if Rivian captured 100% of the electric light truck market in the US over the next 8 years it would still be trading on 5x 2030 sales. Just not going to happen is it?

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