Wall Street and Silicon Valley invested billions of dollars in electric vehicles and related companies in 2020, betting on their future dominance and, in many cases, driving valuations that have little bearing on the companies’ current or expected production and sales.
There is little doubt that the automotive industry is tending toward electric vehicles amid the rise of Tesla Inc. TSLA,
Decreasing prices and increasing availability of electric vehicles or EV; the potential for technological advancements that offer a cheaper, longer lasting and faster battery to recharge; Advances in electric vehicle infrastructure and “green” government initiatives taking hold in the US and elsewhere show the likely path.
And what was once an investment universe that included only Tesla and a handful of fuel cell companies has grown into a subsector that combines industry, technology and transportation, with China as a major driving force as well as base market for electric vehicle manufacturers as well as for the demand for electric vehicles. In total, at least $ 28 billion was invested in public and private electric vehicle companies in 2020, according to data from CB Insights and Dow Jones Market Data Group.
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“The writing is on the wall regarding the long-term debate between electric vehicles and internal combustion,” said John Mitchell, partner at Blue Horizon Capital.
In several countries around the world, people will no longer be able to buy internal combustion engine vehicles in a decade or two, and global automakers have realized that “the transition to electric vehicles is the only way to compete”, He said. .
Not to be left behind, General Motors Co. GM,
Ford Motor Co. F,
and other legacy automakers scaled up investments in electric vehicles and autonomous vehicles, and GM went on to promise to phase out internal combustion engine vehicles in less than 15 years. Tesla, of course, joined the S&P 500 SPX index,
in 2020 after finally showing consistent earnings. SPX,
Startups like Nio Inc. NIO,
Nikola Corp. NKLA,
and Fisker Inc. FSR,
attracted the attention of large investors, and the involvement of special-purpose takeover companies became almost commonplace.
“The EV party is just getting started, fasten your seat belts,” Wedbush analyst Dan Ives said recently. The recent weakness is short-term “growing pains,” he said.
That doesn’t mean that the switch from combustion engines to electric cars will happen quickly. Electric cars currently account for around 2% of global car sales, and estimates for future market share range from a low-end forecast of 10% to 20% of cars sold by 2030 to two-thirds of the market in that moment. time.
Much more money will be needed to finance the switch, despite the billions that have already found their way into EV-related investments. A recent note from B. de A. Securities put a price tag on a future “revolution” in electric vehicles, saying that financing that change remains a “tremendous hurdle.”
Extrapolating the relationship between Tesla’s capital increases and its ability to make vehicles, B. of A. analysts calculated that a shift to a 100% EV world would require more than $ 2.5 trillion in investments, coming from companies, investors. and governments around the world. the world.
Recent capital increases for electric vehicles and related companies through SPACs, or “blank check” companies, “may be just the beginning,” they said.
‘Hypergrowth’ in electric vehicles and renewable energies
The increased interest in electric vehicles and related stocks has raised concerns about a bubble.
At a recent JPMorgan virtual investor conference, global research chief Joyce Chang and others told the audience that they were not seeing “a wide stock market bubble” but that “certain sectors” of the market were experiencing “hypergrowth. , such as electric vehicles and renewable “.
Bubbles, of course, are easy to spot, in hindsight. It remains to be seen if the current influx of money and attention to electric vehicle companies, as well as autonomous vehicles and AV-adjacent companies, will resemble the brief notice given to cloud computing companies half ago. decade, or early Aughts spotlight on fuel cell companies, several of which, 20 years later, have still not returned to their then-all-time highs.
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JPMorgan analysts reminded the audience that EVs, renewables and “innovation” stocks represent a small percentage of the broader stock market, with EVs only about 2% of the S&P 500.
However, with optimism for the future, Blue Horizon’s Mitchell pointed to increasing quality and technical improvements for electric vehicles.
“Battery life will only be extended and with the trillions invested globally by all those who support the electrification of the transportation system, the infrastructure for widespread adoption and use of EV technology will only increase,” he said.
UBS analysts forecast global automakers’ revenues from electric vehicles to drift to $ 1.16 trillion by 2030, from $ 182 billion today.
By contrast, revenue from ICE vehicles, currently $ 1.77 trillion, will decline to $ 1.07 trillion. Software revenue will account for an even bigger slice of that revenue pie by 2030, at nearly $ 2 trillion.
Here is the UBS table, in billions:
A company or a business plan?
Blank check companies have been around for a long time, but they took on a bigger role in American investments last year, when there were more initial public offerings through special-purpose acquisition companies than all other years combined, Garrett said. Nelson of CFRA in a report. recent note.
Activity in 2021 is on track to outperform “by a wide margin” last year, and some of the larger SPAC deals are likely to be back in the “burgeoning electric and autonomous vehicle (EV / AV) space” , He said.
Some of the companies featured “look more like business plans than businesses that generate income or profit,” but there is reason for optimism, Nelson said.
The CFRA analyst highlighted Fisker, Lucid Motors, which plans to go public through a merger of SPAC with Churchill Capital Corp. IV CCIV,
and the private electric truck manufacturer Rivian as companies that are better positioned than others.
Tesla, of course, has established a first-mover advantage that is considered substantial.
UBS analysts estimate that Tesla has a cost advantage of around $ 1,000 to $ 2,000 per electric vehicle over other automakers, although competition is increasing. VOTE of Volkswagen AG,
The MEB platform, the automaker’s building block for its electric vehicles, is already “fully cost-competitive” with Tesla.
VW, the world’s second-largest automaker, is still lagging behind in terms of battery costs, and Tesla is likely to maintain its price advantage in the battery space due to its vertical integration and technological advancements, they said. Still, they see that large traditional automakers like VW could hit an electric vehicle manufacturing cost and margin parity in four years.
Electric vehicles, not autonomous vehicles, could be the real game changer
Related to inverter inputs to electric vehicle manufacturers is the interest generated by lidar, batteries, sensors and other components hailed as key to autonomous vehicles.
Full autonomy has been shown to be a stubborn and costly problem to solve, with many regulatory and technological hurdles.
Despite lofty goals, most cars on the road today offer advanced driver assistance systems that are not dramatically different from systems of previous years and are still far from the game changer they are expected to be. for lives and economies at a not so good time. Distant future.
For now, automakers are primarily focusing on partial range and ADAS offerings that can be marketed in the short term, and EVs are moving forward in terms of consumer interest and regulatory push.
“Electric vehicles are simply a better product,” said Mitchell of Blue Horizon.