Is Searching for “The Next Tesla” Pointless?

People have been trying to find the next Microsoft ever since Bill Gates became the richest man on the planet in 1995. Now, they’re looking for the next Tesla as Elon Musk sits atop the list of the world’s wealthiest people. Moving to America and founding a successful company does wonders for your wealth, and half of the top-ten wealthiest people on this planet founded four of the largest five American companies by market cap.

Those who search for the next Tesla want to think the next electric car success story will come from a company that’s yet to scale manufacturing which seems highly unlikely. What made the Tesla success story so incredible – and so risky – was that Elon Musk built his company from the ground up using first principles thinking. Contrast that to the approach other contenders take where they simply assemble components made by other firms. It seems more likely that challengers to Tesla will come from existing automakers who have the experience, supply networks, distribution networks, and dealerships already in place. And that’s exactly what’s been happening.

Three Types of Electric Vehicle Stocks

Let’s divide the electric vehicle space into three categories:

• Legacy automakers
• Pure-play EV companies that have scaled
• Pure-play EV companies on the cusp of scaling

The last bullet point is one we’ve never found compelling. Scaling is about selling cars, not talking about how many you can manufacture on some distant date. Seems unlikely that any team with a dream that raised hundreds of millions during the SPAC boom will be able to successfully scale without raising more money. If Elon Musk is throwing around the “b-word,” it’s likely other firms see bankruptcy in the not-so-distant future. Let’s define “scaling” as a company that’s sold at least 10,000 vehicles in a single year. That means we’ll be writing off all those companies based on promises, regardless of how much progress they claim to be making. Speaking of promises, here’s how some electric vehicle manufacturers that went public in the past several years have fared so far (market cap and cash in USD millions – company names link to our research where applicable).

EV SPAC	Stock Price	Market Cap	Cash	Update
Lucid Group (LCID)	18.22	28,737	5,392	Claims to be on track to sell at least 12,000 by the end of 2022.
Rivian (RIVN)	29.66	24,192	16,432	Produced 4,401 vehicles in Q2-2022, and expects to meet production goal of 25,000 EVs in 2022.
Polestar (PSNY)	9.56	19,968	758	Through April of this year, the manufacturer delivered some 13,600 vehicles with plans to build and sell 50,000 vehicles this year.
Fisker (FSR)	8.77	2,607	1,042	With production starting in mid-November, only a four-digit number of units can be expected for 2022.
Nikola (NKLA)	5.18	2,181	360	After its founder and CEO was indicted on three counts of fraud, new CEO plans to produce between 300 and 500 Tre units this year.
Faraday Future (FFIE)	4.54	1,372	276	Q3-2022 is when production is planned to start. Company says 14,000 reservations for the FF 91 vehicle were “potentially misleading” because only several hundred of those reservations were paid.
Arrival SA (ARVL)	1.6	1,072	796	Expects to begin assembling its Van model in Charlotte by the fourth quarter of this year after production starts in the UK in the third quarter.
Proterra (PTRA)	4.79	1,068	599	Pivoting from busses towards supplying electric powertrains, batteries, fleet-level chargers, and energy management. Needs an updated article.
Hyliion (HYLN)	3.43	596	258	Expects to sell 100 units of its eX hybrid system to 100 trucks this year for revenue of $2 million to $3 million.
Canoo (GOEV)	2.14	544	109	Running out of cash and issued a “substantial doubt” warning. Forecasts production volumes of 3,000 to 6,000 vehicles in 2022.
Workhorse Group (WKHS)	2.76	451	167	Expects to build roughly 250 vehicles in 2022 after completing a product-roadmap overhaul
REE AUTOMOTIVE (REE)	1.17	377	239	P7 electric platform assembly line expected to become operational in the second half of 2022. Plans to launch production of an electric delivery van and a people mover in 2023.
Lordstown Motors (RIDE)	1.69	344	204	Plans to sell 500 electric pickups this year. Previously forecasted sales of ~32,000 vehicles. Short seller accused them of lying about 100,000 pre-orders, CEO left, GM left, truck uglier than sin.
XL Fleet (XL)	1.165	166	333	It’s really difficult to say what this firm is planning to do as they seem to be dabbling in a bit of everything – from electric garbage trucks to “hybridizing” Ford pick-em-up trucks. And the CFO resigned.

One of the above names is not like the other. Rivian is the only company on the list that didn’t use a special purpose acquisition company (SPAC) to go public, and the end result is a serious war chest of cash. The only other companies in the above list that might merit further examination are Lucid and Polestar. The former expects to hit the 10,000 vehicle mark this year, while the latter is the most mature of the lot. We’ll look to do follow-up pieces on the top three companies in this list, though we’re not convinced any one of them is “the next Tesla.”.

Several years ago we issued A Warning About Electric Vehicle Stocks which called out the excessive hype in the electric vehicle space, SPACs or otherwise. Now that the hype has died down, and the “going concerns” are being raised, all these EV newcomers need to compete not only against Tesla, but also the world’s largest automotive manufacturers that are now producing and selling loads of electric vehicles at scale.

Legacy Auto Manufacturers and EVs

While automakers spend billions of dollars on ads, Tesla differentiates itself by not spending a dime on advertising. Word of mouth sells Tesla’s vehicles, and as a result, they enjoy gross margins among the highest in the industry – nearly 33% in Q1-2022. That’s an advantage that new and existing auto manufacturers will never realize, yet some investors are eyeballing companies like Hyundai that plans to “spend $16 billion on launching more than 30 EV models by 2030 as it targets electric vehicle sales of 3 million vehicles a year.” Let’s put this number in perspective.

Nearly 10% of all cars sold worldwide in 2021 were electric according to the IEA. We can check that number by looking at the below light passenger vehicle sales numbers for various regions of the world – around 14 million vehicles.

Inside EVs tells us that in the first quarter of this year, five companies accounted for 55% of all-electric vehicle sales which totaled 1.44 million units (that’s about 10% of all light vehicles sold, so our numbers are matching across sources). Here are the five companies that sold the most electric cars in Q1-2022 with Hyundai capturing a 5.7% share (percentages in parenthesis reflect the prior year’s market share).

1. Tesla: 310,411 and 21.6% share (vs 25%)
2. SAIC (incl. SAIC-GM-Wuling): 154,623 and 10.7% share (vs 17%)
3. BYD: 144,203 and 10% share (vs 5%)
4. Volkswagen Group: 98,455 and 6.8% share (vs 8%)
5. Hyundai Motor Group: 81,744 and 5.7% share

It’s hard to ignore the number two and three names on the list which happen to be the largest automaker in China and the largest EV manufacturer in the world, also a Chinese firm.

The 500-lb Panda

It’s a shame more Americans don’t know the name Jack Ma because he gives Elon Musk a good run for his money on being arguably one of the greatest entrepreneurs the world has ever seen. It was Mr. Ma who largely formed our bull case on Ali Baba (BABA), that was until we formed our bear case around variable interest entity (VIE) structures and exited our position in September 2020. Since then, shares of BABA have halved as U.S. investors realize the risks surrounding Chinese companies that march to the beat of a different drum. In July 2021, the United States Security Exchange Commission echoed our concerns about VIE structures that give investors no legal ownership of the shares they purport to.

For U.S. investors, this arrangement creates “exposure” to the China-based operating company, though only through a series of service contracts and other contracts. To be clear, though, neither the investors in the shell company’s stock, nor the offshore shell company itself, has stock ownership in the China-based operating company. I worry that average investors may not realize that they hold stock in a shell company rather than a China-based operating company.

Credit: SEC Chair Gary Gensler

There are some Chinese electric vehicle companies that may merit further examination, like BYD, NIO, and NIU. Warren Buffett is an investor in BYD, a company that’s appreciated quite dramatically in a rather volatile fashion. One look at their miniscule margins and we’re not sure this is the type of company we’d want to climb on board with. As for the other two firms – NIO and NIU – we’d need to evaluate the merits of purchasing shares in those firms on foreign exchanges to avoid the aforementioned VIE risks. That’s something that requires a great deal of due diligence because Chinese firms are exceptionally risky, VIE structures aside. There’s more than one Luckin Coffee floating around over there, and some of the scandals that have happened in China make Enron look mild. Perhaps the bigger question to raise might be around the merits of the electric thesis vs. the autonomy thesis.

Electrification or Autonomy?

ARK Invest puts out some mouth-dropping price targets for Tesla in their open-sourced valuation model that predicts the emergence of a robotaxi will transform Tesla into an entirely different animal.

In a 2019 research piece, ARK suggested that the Tesla robotaxi might achieve margins in the range of 50%, so that explains why it could also produce a third of revenues while contributing a majority of the profits. Of course, that same research piece said to expect “full autonomy to launch commercially in 2021,” so we need take it all with a grain of salt. That’s not ARK’s fault because Mr. Musk has been overpromising and underdelivering on autonomy for a while now (more on this in a bit).

Maybe the real value to chase is not vehicle electrification, but vehicle autonomy. That doesn’t necessarily mean investing in LiDAR pucks, it means investing in a service operator who expects to see software-like margins while charging “roughly one tenth of the price charged by Uber and Lyft.” It also doesn’t imply new vehicles need to be developed. At least two companies are leading the pack when it comes to operating robotaxi services – Cruise and Waymo – with neither company manufacturing their own vehicles, and both firms now being allowed to accept paying passengers in San Francisco.

Cruise has been offering free driverless rides to San Franciscans in its autonomous Chevrolet Bolts between the hours of 10:30 p.m. to 5 a.m. since February. The company began testing its autonomous vehicles without a driver in the front seat in the city in 2020, and started giving passengers free test rides in June 2021.

Credit: TechCrunch

Unanticipated problems are likely to arise when operating in places like San Francisco. No, not armed robberies, we’re thinking of kinks in the operating model, like when Cruise’s robotaxis all decided to group together and block traffic several days ago for no apparent reason. When people criticize Elon Musk for slipping delivery dates for his own robotaxi offering, they need to consider he’s probably learning from mistakes made by competitors to better craft his own product launch.

The TechCrunch article goes on to say Google subsidiary Waymo, Cruise’s chief competitor, also has a driverless car permit for California, but they need to have a safety operator present during rides. That’s a slight setback for Waymo which has been operating a fully autonomous taxi service in Arizona since 2020.

Seems like the type of vehicle to achieve those juicy 50% gross margins doesn’t matter so much. Cruise uses all-electric Chevrolet Bolts and Waymo uses Chrysler Pacifica Hybrid minivans, among other vehicles. What matters is the training data that’s being accumulated as these vehicles wander around the streets picking up passengers and dodging the homeless. ARK’s bullish outlook on Tesla makes a key assumption – that the company with the biggest data set will prevail. All those Tesla owners enabling autopilot on their vehicles are acting as beta testers for Mr. Musk as they voraciously churn out training data for hungry AI algorithms to consume.

Conclusion

Tesla was an exception to the rule because they employed first principles thinking and built an automobile company from the ground up while taking on a great deal of risk to do so. We’re going to assume there’s not another Tesla lurking in the shadows. That leaves us with legacy automakers of which we have no desire to invest. That’s because it doesn’t matter how many electric vehicles get sold, it’s still a legacy automaker that’s selling them. The process of developing a vehicle, manufacturing it, marketing it, selling it, and servicing it, doesn’t change much when moving from gas to electric.

At least that’s what we thought until we came across Gogoro. They’re a Taiwanese firm that’s built a popular (at least in Taiwan) electric scooter with a replaceable battery and subscription model that seems quite compelling. Now, they’re planning to enter the world’s biggest market for electric vehicles, China, and we’ll be keeping a close eye on how they progress. That’s an example of an EV manufacturer doing more than just building electric cars.

Are there any other interesting publicly traded companies we ought to look at in the area of electric vehicles and/or autonomy? Nothing under $1 billion market cap, please. We’ve already seen enough of those today.

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