Electric Vehicles Market Analysis – Valuations Too High?

Previously, we posted an article on Tesla and talked about how its valuation compares with other automakers in the industry. Today, we want to look at how the overall electric vehicles market compares with the conventional automakers.

Limit of Electric Vehicles Market

No doubt we will see a clearer picture of the winners in the EVs market in the years to come. And perhaps even an expanded size of the automobile industry.

But at the moment, I think the boundary as to how far this can go is rather tight.

Logically, if one buys an EV, this will mean that one less conventional fuel-driven vehicle will be purchased. So, this should apply to most of the demand that we see today and in the future.

Market value of electric vehicles market

Source: Research Affiliates, LLC, based on data from Bloomberg.

Yet, the overall market value of traditional automakers has climbed higher, as the value of the EV-manufacturers surged as well.

All in all, the market value of the whole automobile industry has nearly doubled over the last 3 years. What this implies is that either the market is predicting that there will be twice the demand for cars. Or that the transformation from fuel to electric-driven vehicles will be significantly more profitable. Or a combination of both.

Another potential reason for such valuation is that these rising EV companies will capture more value than just the automobile industry. One example is the ability to profit from the autonomous robotaxi service as well.

Valuation of Electric Vehicles Market Specialist Companies

Price to sales comparison of electric vehicles market with traditional automakers

Source: Bloomberg Opinion / Price-to-Sales Comparison, EV Specialists vs Traditional Automakers, as of Jan 31, 2021

As a result, we saw the market pricing EV specialists’ shares at more than 10 times a year’s sales. And in some cases more than 100 times, or even 10,000 times as in the case of Nikola.

Comparatively, shares of great brands of conventional automakers such as Totyota, Volkswagen and General Motors, are selling for less than a year’s sales.

Annual revenue comparison between electric vehicles market and traditional automakers

Source: Bloomberg Opinion / Annual Revenue, EV Specialists vs Traditional Automakers, 2018-2020

The reason for this discrepancy is that these EV-Specialists are still not making much sales yet. There’s a slight increase in electric cars sales in 2020. Whereas traditional fuel-driven automakers saw a share drop in revenue due to the recession brought about by the Coronavirus pandemic.

EVs Companies Trading Higher Than Traditional Automakers: The Catch

Well, no doubt the EV-Specialists deserve to trade at higher multiples. Because, the market is pricing the growth into their share prices.

For instance, many recognise that Tesla is the market leader of EVs. The company has created battery, supercharging and self-driving technologies. These technologies are considered to be years ahead of its competitors according to analysts. As such, the company positions itself strongly to dominate the EVs market in the years to come.

There is a very possible chance that this first-mover and competitive advantage can give Tesla a head start. They will enable the company to capture a good chunk of the market share, and justify its surging share price.

But we want to highlight that other EV companies are seemingly priced to dominate the electric vehicles market as well.

Ultimately, the early EVs backers may be completely right on the companies that will revolutionize and dominate the automobile industry. Just like how the internet has changed the way we live.

And indeed some of the internet and tech companies today have proved to hold strong and sustainable competitive advantages that protect their profits. In the process, they have generated amazing returns for its early investors.


Airline Industry Case Study: Gigantic Market But Limited Profits

Source: IRS Statistics of Income / Airline Industry Profitability 

On the other hand, the once exciting airline industry proved to be a space where airline companies are unable to create any durable competitive advantage. This explains the generally unprofitable industry since deregulation in 1978.

We want to point this out for investors to have a more balanced view amidst the excitement of what EVs can bring us in the future.

Just like during the beginning of internet ecommerce, early backers were sure that one of the online retailers will dominate the market. The challenge was not knowing which one. Hence, one way to ride on the wave was to invest in most or all of the promising companies.

Well, this method might work if their shares were priced reasonably.

But for this case where many EVs companies are priced like they are all going to be the ultimate winners, then this strategy may not be that viable after all. Your winning investment will not be sufficient to compensate for the substantial downsides that holding other losing companies will cost.

Conclusion

To wrap it up, the Electric Vehicles market does present some exciting evolution and opportunities in the automobile industry.

However, at this point in time, we think the valuation seems pretty high. Pricing in potential revenue or profit drivers from services that are not yet in production, such as the autonomous robotaxi services, may not be wise for the general investors out there.

Also, the market seems to neglect traditional automakers, with strong brands and market presence. They can potentially catch up and capture substantial shares of the market for EVs.

Then again, do assess the individual investment prospects and potentials in order to make a decision.

Today’s sharing is more of taking a step back and looking at the whole automobile industry to shed some lights of the valuation of EV-manufacturers compared to the traditional automakers. Rather than assessing whether one can invest in any of the companies.

Let me know your thoughts about this, and share with us in the comment below.

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