A Warning About Electric Vehicle Stocks

Easter European cities have had electric trams running through them for decades now. Using electricity to transport large numbers of humans on trains and buses isn’t anything new. What’s changed is that improvements in lithium battery technologies now mean we can economically electrify much smaller vehicles like passenger cars, motorcycles, or scooters.

The most visible advances in electric vehicles are those made by Tesla, a company that dominates the U.S. market with about 60% market share of all electric cars on the road. As Tesla’s shares soar into the stratosphere buoyed by their competitive position in autonomous driving, other stocks that would be considered pure-plays on the electric vehicle theme are also enjoying the benefits. Since there is no “electric vehicle sector classification,” we can group electric vehicle stocks into two broad areas:

  • Major auto manufacturers
  • Companies that only sell electric vehicles (including pre-revenue companies)

The first category represents a large set of companies that all have varying degrees of exposure to the electric vehicle theme with none being pure-play given their sizes. All of the 14 major players in the auto industry that control most of the brands are already dabbling in electric.

Credit: Business Insider

We’re going to exclude related themes such as companies that sell batteries, or companies that build and maintain the charging networks. We’re also going to leave hydrogen fuel cells out of it. Today, we’re sticking with publicly traded companies where the primary focus is on building and selling electric vehicles.

A List of Electric Vehicle Stocks

  • Nikola Motors (NKLA) +254%
  • Hyliion (SHLL) +117%
  • Fisker (SPAQ) +36%
  • Workhorse Group (WKHS) +440%
  • Arcimoto (FUV) +270%
  • Electra Meccanica Vehicles (SOLO) +58%
  • Tesla (TSLA) +280%
  • BYD (1211:HK) +94%
  • NIO (NIO) +208%
  • NIU (NIU) +112%

Above you will see a list of ten publicly traded stocks that derive – or plan to derive – the majority of their sales from electric vehicles alongside the year-to-date returns for each. Even in the face of “the rona,” all of these stocks have bested the Nasdaq which only returned +24% YTD. Seeing consistently abnormal returns across a small set of stocks is usually evidence that they’re all being dragged along based on hype, some of which could be attributed to what’s happening with Tesla stock.

We already presented the extreme bear case and the extreme bull case in a piece last week titled Here’s Why Short Sellers Are Shorting Tesla. Today, we want to talk about the rest of the names on the list. Here’s how all these companies compare by market capitalization with the six smallest grouped together:

Credit: Nanalyze

And here’s how all these companies compare by revenues, a decent proxy for “electric vehicles sold:”

Credit: Nanalyze

All these companies are talking about selling electric vehicles but only four are actually doing it at scale. We often talk about how important revenues are to demonstrate traction because without them, you are investing solely on the promises of management. We see that Tesla along with three other Chinese electric vehicle firms – BYD, NIO, and NIU – are all producing meaningful revenues, so we’ll leave them out of this discussion and focus on the rest that are not.

Arcimoto and Electra Meccanica

We previously wrote about Arcimoto and Electra Meccanica when their shares were surging last year because they were being compared to Tesla. Neither of these firms breached $1 million in revenues for 2019, which isn’t a total surprise considering how some of these electric vehicles look.

Electra Meccanica’s SOLO is a three-wheeled EV that feels like a luxury electric car, but is technically registered as a motorcycle – Credit: Electrek

In that same year, Tesla sold 357,000 electric passenger vehicles that were built by industrial robots and brought in almost $25 billion in revenues. If your company has only managed to sell a few cars or produce a few prototypes, you have proved very little, and should not even be mentioned in the same breath as a company that produces 1,000s of cars, Tesla or otherwise.

Unfortunately, it’s quite common now to hear electric vehicle companies comparing their businesses to Tesla when they haven’t even broken ground on a factory.

Electric Vehicle SPACs

We recently wrote about how the special purpose acquisition company (SPAC) is great for everyone except retail investors. Not only are these investment vehicles prone to demonstrate irrational exuberance, but they also allow companies to offer shares to the public with little more than a management team, a prototype, and a glossy investment deck filled with optimistic promises. It’s similar to the old reverse merger process you’ll see penny stocks go through to get publicly listed, except in the case of SPACs they’re getting listed on major exchanges.

Nikola Motors was the first to go public using a SPAC, and then Hyliion followed shortly after. We wrote about both of these firms in the below pieces:

Fisker is also going the SPAC route as well, a company that already went bankrupt once after burning through $1.4 billion. Out of these three names, only Nikola has actually put ink to paper on its SPAC merger, so the other two are being propped up before the deals have even closed.

Speculate all you want but avoid investing in any of these double whammies of risk – zero revenue companies going public using a SPAC. As we said before, everybody participating in SPACs will benefit except you, the retail investor, who will be left trying to pick up shares being pumped by amateur traders over at Robinhood. If you want to take that much risk, why not just go buy the real deal and pick up some Tesla shares?

Passing on Workhorse Group

The last name in our list is Workhorse Group which started getting attention about a month ago when they successfully completed Federal Motor Vehicle Safety Standards (FMVSS) testing for their electric delivery vans which they’re supposed to begin producing in November of this year. More recently, speculations alone have been enough to move the stock price.

Credit: SteetInsider.com

This analyst is more than doubling their price target based on pure speculation as opposed to responsibly advising the herd about how overheated the stock has become after rising +524% in less than two months. “Analysts” who completely ignore the basic principles of finance and give such guidance to investors – many of whom are probably new to the game – shouldn’t be allowed to have a voice. The Washington Post wrote a piece about this same firm’s previous involvement in arranging a public offering of China Electric in which “U.S. investors lost millions, and lawsuits followed.” The recent documentary, The China Hustle, covers a similar topic. It’s best summed up by the SCMP:

While the West was staring in trepidation down the barrel of economic depression, China was hosting the only vibrant market – but foreigners were excluded. That prompted investment banks such as Roth Capital and Rodman & Renshaw to list hundreds of small Chinese firms directly on United States stock exchanges, earning themselves big money. Analysts would then recommend the colossally overvalued stocks as sound investments, with company bosses in China growing rich on the proceeds.

Credit: SCMP

When you have a hedge fund talking about how much money they made on Workhorse Group, and advising people to move on to their next “pick”, the whole thing reeks of manipulation. Investing in technology stocks is risky enough. When you spot red flags like these, move on.

You’ll often see electric vehicle stocks touted as “Tesla killers” as if there is no other threat to Tesla except companies with prototypes and master plans. The below chart by CleanTechnica shows just how many major auto manufacturers are already successfully selling electric vehicles at scale that compete with Tesla.

Credit: CleanTechnica

If there’s a Tesla killer out there, seems more likely it’s an existing automaker that has more experience producing and selling cars than Tesla. And it probably speaks Chinese.

Conclusion

Many newbie investors see abnormally large returns in the short term as validation of a stock’s future potential. The efficient market hypothesis tells us to treat rapidly appreciating stock prices with a great deal of suspicion. Some of these stocks are being hyped by promoters, some are surging based on some speculative comments being made, and all without meaningful revenues are best avoided.

There is no such thing as “the next Microsoft,” or “the next Tesla.” You won’t fund an early retirement by trying to cherry-pick a winning electric vehicle stock that’s being peddled by financial professionals who seem to have temporarily forgotten how important diversification is.

Here at Nanalyze, we hold the lion's share of our investing dollars in a portfolio of 30 dividend growth stocks. Become a Nanalyze Premium subscriber to access our report on Quantigence - A Dividend Growth Investing Strategy. We'll show you how we selected our 30 stocks and teach you how to build your own dividend growth stock portfolio.

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