Are Electric Vehicle Stocks in a Bubble?

With a market capitalization of $400 billion, Tesla became the world's most valuable automaker.

On December 21, the company will join the prestigious S&P 500 index — one of the most important measures of success of America's largest publicly-traded firms.

Toyota's market capitalisation is currently $220bn, almost half that of Tesla's $415bn, even as it churns out annual sales of 10m vehicles compared with the 500,000 electric cars the US group plans to produce this year. 

Toyota President Akio Toyoda acknowledged that Tesla's valuation of around $400 billion is sky high, exceeding that of all seven Japanese automakers combined.

He also said Toyota could learn from Tesla's success with investors, and its business model, which includes revenue from electric vehicles, regulatory credits, software and renewable energy products.

But, the exec went on to compare Tesla's business to a restaurant still promoting its recipes, while Toyota is more like a restaurant already serving a huge number of customers.

"I am hesitant to say this — Tesla's business, if you want to use the analogy, is like that of a kitchen and a chef," Toyoda said.

"They have not created a real business in the real world yet. They are trying to trade recipes. The chef is saying 'Our recipe is going to become the standard of the world in the future!' At Toyota, we have a real kitchen and a real chef too, and are creating the dishes already. There are customers, who are very picky about what they like to eat, sitting in front of us, and eating our dishes already."

While Chinese electric vehicle also surged this year.

BYD, China's largest electric carmaker, trailed only Tesla, Toyota and Audi as of November 5, and was the world's fourth-largest automobile company by market value. Its mainland Chinese shares have surged by more than 330% this year, and the Shenzhen-based carmaker is valued at US$73.4 billion. 

Xpeng Motors, one of four Chinese carmakers among the world's top 20 by market value, said on Thursday that its third-quarter revenue had jumped by 342.5% to$300.4 million, thanks to strong sales of its P7 model. The company delivered 8,578 units in the quarter ending on September 30.

Nio is viewed as a bellwether of the Chinese electric-vehicle industry and is valued at US$50.9 billion, is ranked sixth globally. Its shares have skyrocketed more than ninefold this year.

Li Auto is the fourth Chinese carmaker to make the top 20 globally, and comes in at No. 19. Its Nasdaq-listed shares have risen by about 117 per cent since its listing in July, and the company is valued at US$21.2 billion.

Are Electric Vehicle Stocks in a Bubble?

Tesla has had the BEV market to itself as it has ramped up production and sales. That has kept investors satisfied as they bid up shares hoping the long-term outcome is a vertically integrated renewable energy company, with electric vehicles, solar panels, and leading battery and energy storage technology. 

While that all may come to fruition, investing on hope can lead to outlandish valuations. And legitimate competition is coming from other BEV manufacturers, including established automakers. 

Valuations are difficult to gauge on these EV start-ups, as some don't even have sales, let alone earnings. Using those metrics for the companies that do show price-to-earnings and price-to-sales ratios beyond what makes sense with the business fundamentals. 

There's nothing wrong with speculative investing with a small portion of a portfolio. By definition, these types of investments have long-term time horizons when a company's product or technology is cutting-edge. But when speculation by a large group of investors quickly drives share prices beyond any reasonable form of valuation, it's called a bubble. 

Tesla may live up to expectations and be a dominant player in the BEV, battery, storage, and solar-panel markets. But its share price acceleration, along with that of other new players in the sector, shows the makings of a market bubble. Investors may be smart to remain on the sidelines until that bubble bursts before adding money into many of these names.