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Electric-vehicle makers such as Tesla and Nio account for almost half of the value wrapped up in auto makers. Bullish EV investors must believe three things.
Spencer Platt/Getty Images
Electric-vehicle makers account for almost half of the value wrapped up in auto makers. Does that make sense?
Monday, Bernstein analyst Toni Sacconaghi asked that question. He’s a
Tesla
(ticker: TSLA) bear—rating shares Sell with a $300 price target—mainly because he believes the stock is pricey. Still, EVs can be worth half of the industry if investors buy into three ideas.
Today, 16 EV makers—including Tesla and yet-to-be public Rivian—are worth a combined $1.14 trillion. Tesla accounts for 74% of total EV value. Four of the top 10 most valuable auto makers are EV companies including:Tesla, Rivian,
BYD
(1211.Hong Kong), and
NIO
(NIO).
As for the makers of conventional vehicles, more than 50 auto makers are worth a combined $1.42 trillion. The most valuable traditional car companies are:
Toyota Motor
(TM),
Volkswagen
(VOW3.Germany),
Daimler
(DAI.Germany), and
General Motors
(GM).
Sales by the traditional companies still dominates unit volume, selling about 99% of the cars globally—97% of those are gasoline-powered, and 2% are EV. The EV pure-plays sell the remaining 1% worldwide.
“The thinking, of course, is that pure-play EV vendors will ultimately come to dominate the automotive world,” wrote Sacconaghi in a Monday report.
That’s the first thing investors need to believe to justify EV valuations. Sacconaghi points out that 2014 pure-play EV companies accounted for 14% of electric-car sales. That’s 28% today. Pure-play EV companies’ market share is growing.
That’s the second belief required to stay bullish on EV makers’ stocks—that market share will continue to improve. “We suspect the market believes…that traditional OEMs will not be able to deliver competitive EV offerings in the future,” adds the analyst in his report. OEM is short for original equipment manufacturer, industry jargon for auto maker.
The final thing investors need to believe is that EVs will be more profitable, per car, than conventional vehicles. EV companies tend to sell direct—which can help profitability. EV makers are also the leaders in selling add-on subscription based services. Tesla’s Full Self-Driving Capability, or FSD, is probably the best example. Tesla sells the higher levels of its autonomous-driving software as a monthly subscription or for $10,000.
The mix of volume and profit growth driven by superior products could justify valuations, but Sacconaghi isn’t a believer. “Our contention is that the automotive industry is an increasingly global and hypercompetitive industry and we believe that surplus profits and technology innovation will likely be competed away over time.”
His views of the industry is one of the reasons he calls Tesla valuation “too rich.”
Time will tell who is right. Sacconaghi’s target price still implies Tesla should be the world’s most valuable car company, just not two to three times the value of Toyota.
Tesla stock has been on a tear of late, adding 34% over the past three months as investors have become more bullish about third quarter earnings due out on Wednesday evening. Shares have gained another 2.1% Monday. The
S&P 500
and
Dow Jones Industrial Average
are down 0.1% and 0.3%, respectively, on Monday.
Write to Al Root at allen.root@dowjones.com