It’s bizarro world in the auto industry, again

It’s not just Tesla.

Electric-vehicle startup Rivian (RIVN) has roared into public markets with a killer public offering and a market value of $116 billion. That’s 32% more than General Motors (GM) is worth, and 47% more than Ford (F). Rivian has never sold a vehicle until this year. GM sells around 7 million vehicles per year; Ford, 4 million.

If you add up the market value of Tesla (TSLA), Rivian, and 5 other startups including Lucid (LCID), Nikola (NKLA), Fisker (FSR), Lordstown Motors (RIDE) and Workhorse (WKHS), their combined capitalization is nearly $1.3 trillion. Nine of the world’s biggest automakers—GM, Ford, Stellantis, Toyota, Nissan, Honda, Volkswagen, BMW and Daimler-Benz—are only worth $845 billion. So those 9 giant automakers are worth 34% less than 7 fledgling EV manufacturers. As for sales, the established manufacturers outsell the EV upstarts 100 to 1.

Does this make sense? Traders have grappled with Tesla’s stratospheric valuation for years. Many investing pros who bet that Tesla was overvalued crashed and burned as the stock soared beyond almost anybody’s best guess. The market now seems to view Rivian as a Tesla-in-the-making, especially since it already has backing from Amazon and Ford. By focusing on sport pickups and delivery vans, Rivian has one foot in consumer vehicles and the other in commercial applications, a shrewd mix that lets the company spread its bets on a trend that is already a revolution in ground transportation.

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While legacy automakers and EV startups both build cars, the market treats them quite differently. Here’s why EV makers earn such rich valuations compared with traditional car companies:

Growth. In market terms, investors consider EV newcomers such as Tesla and Rivian to be growth and technology companies with tons of upside potential. Traditional automakers are industrial concerns capable of incremental growth, at best. While virtually every big automaker is developing EV technology, the old ones won’t attain nearly the same rapid growth as the new ones will. That’s because they have massive investments in internal-combustion engines, or ICE—a.k.a. gas-and diesel-powered cars—that will decline as the new EV technology ramps up.

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Rivian employees stand beside the new all-electric pickup truck by Rivian, the R1T, as it sits at one of its facilities on November 09, 2021 in the Brooklyn borough of New York City. The company, which makes electric trucks and is backed by Amazon and Ford, has has been valued at $64 billion ahead of its IPO tomorrow. (Photo by Spencer Platt/Getty Images)

GM, for instance, sold 202,000 EVs in 2020, which was third most of any automaker, behind Tesla and Volkswagen. But for GM the technology of the future represented just 3% of all sales. The other 97% were legacy ICE vehicles likely to decline as a share of the overall market for years to come. At Tesla, 100% of sales were EVs, with no legacy business to manage.

The new technology is where the growth is. Tesla’s revenue growth rate during the last two years has been 39%, according to S&P Capital IQ. GM’s has been a negative 5%. Pandemic disruptions have been a factor in both company’s performance, but the trend was the same before the pandemic. GM still makes a lot of money selling high-margin pickups and SUVs, but investors view that as a business that could someday dwindle to no profit at all. Electrics, by contrast, will only get more profitable as costs drop, technology advances and more people buy them.

Capital. Traditional carmakers such as GM and Ford argue that the profitability of existing lineups gives them an advantage because they have in-house funding for new EV technology. But startups haven’t needed in-house funding because capital markets have been a ready source of money. “Capital for EV [manufacturers] is widely available and cheap in current market conditions, so we believe momentum/support for many of the stocks will persist,” analyst John Murphy of Bank of America wrote in a recent research note. “As has proven the case for Tesla over the past decade, the higher the upward spiral of stock, the cheaper capital becomes to fund growth.”

Risk. Since investors view EV startups as tech or growth stocks, they tend to tolerate and even encourage the kind of risk-taking that can cause losses but also generate breakthroughs. Much of Tesla’s first decade as a company was a high-wire act, with CEO Elon Musk routinely missing deadlines and understating the company’s financial woes. Investors rarely cared, bidding the stock up almost the entire way. It’s hard to imagine the CEO of GM or Ford getting away with Musk’s antics, which would be completely out of character at a U.S. industrial stalwart. Tesla shareholders recognize that Musk’s eccentricity coincides with a genius for seeing the future before others. Many other companies would toss such a bomb-thrower overboard, to maintain stability or appease fussy shareholders. Not a problem at Tesla and the like.

None of this means big automakers are dead. Many have compelling EVs on sale or in the works, such as the new Hummer coming from GM, the Ford F-150 Lightning pickup and the Volkswagen ID.4. While Tesla stock has been turning ordinary investors into millionaires, GM and Ford haven’t been too shabby either, this year. Ford is up 120%, with GM up 47%; both companies have been gradually convincing investors they’re morphing into EV companies possibly capable of leading the pack.

But Old Auto may have a lot more transforming to do. Morgan Stanley analyst Adam Jonas has argued that GM and Ford should spin off their EV operations into new companies that would have growth opportunities similar to Tesla—and no legacy business weighing them down. The aging ICE assembly lines—which Jonas likens to coal-fired utilities—would operate as separate companies for as long as they’re profitable. GM shareholders in particular could win big, because GM’s various divisions may be worth a lot more split apart than they are together. So far, GM and Ford have indicated no interest in such a move.

It’s also possible some of the EV high-flyers will stumble, since major hurdles to widespread EV adoption remain. The United States still has an inadequate charging network, and that may remain the case: more chargers are coming online, but EV sales are soaring, too. GM’s embarrassing setback with flammable batteries in its Bolt EV reveal that technical hurdles are still steep. EV batteries also require several minerals that generate a lot of pollution when mined, which means they’re not as environmentally desirable as it might seem. There are early leaders in the EV race, but there’s still time for laggards to overtake them.

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.

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