The EV Bubble

Tesla and Elon Musk have had quite the 2020, and it doesn’t appear as though 2021 will be too different. The entire EV market, in fact, is full of mixed opinions, both Bull and Bear, but which is right? Well, the argument for the former is very much based on EVs being the future. This article aims to explore the latter and the reasons why the EV market is starting to look far dimmer in 2021.

Since the start of the year the EV market, and all of its associated markets, have been in a steady decline. At the time of writing, the % price difference from 52wk high figures for Tesla, Nio, and Nikola read -23.8%, -35.4%, and -81% respectively.

The top 9 charging companies are down an average of 31.4% by the same metric, and the top 9 independent battery companies are down 43.8%. These bleak numbers could be the foretelling of the decline the EV market is set to see over the course of 2021.

Furthermore, Tesla and Nio have EV/Sales ratios of 19.6, and 33! Within the traditional auto manufacturing industry, GM and Ford have ratios of 0.9 and 0.3 respectively, hinting that the EV market is significantly overvalued.

For Tesla, in particular, the Bear case against it is a rather convincing one. Firstly, the majority of the company’s revenue doesn’t actually come from cars. It comes from the sale of regulatory pollution credits to other car manufacturers, something that doesn’t bode well for a future in which all manufacturers are electric and won’t demand these credits.

Secondly, range. Range is what used to set Tesla apart from the competition, and yet the Lucid Air (a car going into production later this year) is said to beat the Tesla Model S. Porsche, Mercedes, and Audi are also all hot on Tesla’s (w)heels, as they begin to expand into the EV market.

Furthermore, the luxury interior appeal of a Tesla is soon to be a common theme among EV manufacturers, with Mercedes recently revealing their “hyperscreen,” which almost mimics that of Tesla’s.

As with any stock, the price is, at its core, a case of supply and demand. For Tesla, the latter has certainly grown over the last year. The CARES act passed by the US Government, twinned with news coverage of Robinhood/Reddit etc. has driven hordes of retail investors into the market, with large proportions buying up Tesla stock. This has contributed to the company trading at 1,100 times price to earnings, far beyond the rest of the auto industry (16.71X), again alluding to just how much the stock is potentially overvalued.

Whilst EVs are the future, with hydrogen possibly beyond that, the entire ecosystem lacks infrastructure. Charging points are on the rise, and yet Tesla only has 500 or so superchargers across the UK. This only strengthens the hypothesis that Tesla doesn’t really have a substantial first-mover advantage, and other manufacturers will flood the marketplace as the charging points populate. It’s at this point that a soar in EV markets would be expected.

Considering all of these factors, its more than viable to suggest the soar in EV stocks has been premature, and whilst the technology will become mainstream in the next few years, the stock market may be a better indicator of what’s exciting, and not what’s on the road. Given the sharp falls seen recently, could the EV market be in a bubble that’s popping?