Will the mania for EV stocks be a highway to hell for investors?
What is it with investors and electric vehicle companies? I get that the demand for battery-powered vehicles is rising. And that the potential market is huge. But what we are seeing right now is a turbo-charged speculative fervour that is off the charts. And to me, that’s batty.
This is the first in a new, irregular blog series called That’s Batty. How long it lasts will largely depend on how long the current investor exuberance continues.
On 23 September, California state Governor Gavin Newsom announced California will phase out gasoline-powered cars and drastically reduce demand for fossil fuel in California’s fight against climate change. Specifically, Newsom issued an executive order requiring sales of all new passenger vehicles to be zero-emission by 2035 as well as additional measures to eliminate harmful emissions from the transportation sector.
The California announcement was not just another nail in the coffin for the internal combustion engine and the fossil fuel industry; it was also a shot in the arm for a new wave of speculative fervorr fueled by free money and stupid valuations.
Investor enthusiasm and ignorance of fundamentals is the source of spiraling valuations for both privately and publicly-traded EV companies. Wherever and whenever valuations are so ridiculous that a founder can become a paper billionaire, investors will find a conga-line of startups announcing plans to go public.
In the past the route to the public boards was via an IPO, but today Special Purpose Acquisitions Companies (SPACs) have aggregated investors with the common characteristic of being extra idiotic, under the mutually agreed aim of paying a ridiculous price for something that might keep going up given that there must be even more stupid people out there to pay more.
In the EV space investors justify their ebullience by citing better technology, regulatory tailwinds and investment in electrification by traditional automakers all the while ignoring the capital intensity, substantial competition and consequent low returns.
It seems to me that through a failure to understand history, every new generation of investor is destined to repeat the mistakes of the past. Each generation has their boom and their bust. From the go-go years of the 60s to the late 80s, the late 90s, the late 00s, and now the late 10s, each generation must be thrown a giant financial party and then clean up afterwards. As I have said before; the future is only clear once it has passed.
There is no doubt the market for plug-in hybrid and battery-powered vehicles will expand dramatically by the mid-2020s. But it is also the case that the total addressable market is no bigger than the current market for cars.
It is also true that more governments globally are encouraging the use of electric cars just as California has. Once again, it just means existing car companies will need to retool.
Changing the propulsion system of a car doesn’t change the economics of making them and, even if it does, the fact that every other manufacturer will enjoy the same economics means that no advantage is conferred. Under that scenario, pricing will reflect the better economics and the returns to owners will settle at about where they are today.
While a plethora of emerging electric vehicle startups that will enter the market hoping to disrupt the incumbents, investors should be aware that it is often better to short sell the losers than to try and pick a winner.
There have been over 2000 car manufacturers that have failed since Karl Benz first drove his horseless carriage in the late 1800s. Trying to pick the winner would be near impossible. You would have been better off shorting blacksmiths.
When a new technology emerges, its ability to change the world gets investors very excited but often it’s the consumer that wins rather than shareholders. Think TV, air transport and the motor vehicle – billions, if not trillions, have been lost making this stuff and fighting for market share, with consumers always better off.
And so we come to the latest That’s Batty factoid.
A Texas-based truck electrification business, called Hyliion and founded by 28-year-old chief executive officer Thomas Healy, is being merged (subject to SPAC shareholder approval) with cash-box Tortoise Acquisition Corp.
The company is not a truck manufacturer. Hyliion intends to supply hybrid and electric thrust systems that can be fitted into existing long-haul trucks to lower emissions, comply with new regulations and lower running costs.
At this stage the company is not expecting to generate revenue until 2022.
So what should this idea be valued at. How about US$7 billion? Sounds reasonable? That’s higher than Auckland International Airport and just shy of Santos and Suncorp.
It gets more interesting however when you realise that not only will Healy have a paper worth of US$1.5 billion but that, based on regulatory filings analysed by Bloomberg, the SPAC’s private equity sponsor has invested less than US$7 million into the SPAC and will receive about US$450 million in equity value from the acquisition of Hyliion.
That US$450 is about 80 per cent of the $560 million in cash proceeds Hyliion receives by merging with Tortoise. In other words, there are huge incentives to set these SPACs up and then find some stupid investors to invest in something stupid. Why not EVs?
North American SPACs have raised more than US$40 billion so far this year, according to Bloomberg. And now you know why That’s Batty.When a new technology emerges, its ability to change the world gets investors very excited but often it’s the consumer that wins rather than shareholders. It is often better to short sell the losers than to try and pick a winner. Click To Tweet