In an otherwise lackluster economy amid coronavirus jitters, the electric vehicle (EV) space is one of the few sectors that is witnessing meteoric growth lately. Climate change concerns, stricter emission rules, favorable government regulations and improvement in EV infrastructure on the back of superior technologies are fueling demand.
EV stocks including Tesla TSLA, NIO Inc. NIO, Nikola NKLA and Workhorse Group WKHS have dazzled Wall Street as the excitement surrounding green vehicles is soaring with each passing day. ( EV Stocks On Fire: Will Tesla Make It To The S&P 500 List?)
Despite the fact that the overall auto sector is suffering from coronavirus woes, EV stocks are experiencing huge gains as investors are betting big on the future of e-mobility. Shares of Tesla, NIO and Workhorse have registered triple-digit gains of 117.6%, 397.7% and 616.1%, respectively, over the past three months.
Electric-truck startup Nikola has been on a roll since it joined Nasdaq after a reverse merger with VectoIQ on Jun 3. The stock has risen 59.6% since then.
The alarming question is have EV stocks rallied far beyond a reasonable price and entered the bubble territory? Well, many analysts believe so. The stunning gains in the stock price of these EV makers have pushed their market values exuberantly. With the eye-popping gains, the stocks' valuation has got out of hand.
Lofty Valuations Raise Red Flags
Recently, Tesla’s market capitalization rose above Toyota’s TM. The carmaker is now worth more than many of its peers combined, including General Motors, Ford, Fiat Chrysler, Volkswagen, Honda and BMW. Optimistic investors are betting on Tesla taking over the automotive world, but this enterprise still has a long way to go. It should be noted that Tesla is yet to post an annual profit. Also, Tesla sold its 1 millionth car in March, which is less than 10% of what Toyota sells annually. Many Wall Street analysts have been raising alarm that Tesla is overvalued. Earlier this year, even Tesla’s CEO Musk said that he believed that the firm’s share price is too high. Notably, Tesla’s current EV/EBITDA stands at 91.86X, way higher than the industry’s 19.24X.
Seemingly, investors are piling on EV stocks based on the current hype and promises but are overlooking the companies’ financials. Despite Workhorse’s 50.67% year-over-year fall in revenues in 2019 and high debt levels, investors seem to be in love with the stock, as is evident from the price gains. Notably, Workhorse’s current EV/EBITDA stands at 142.52X, way higher than the industry’s 5.48X.
Indeed, NIO has come a long way since the start of 2020, when it faced a cash crunch and was on the brink of filing for bankruptcy amid the COVID-19 eruption in China. However, high debt certainly weighs on the firm. Also, NIO generated negative gross margins in the first quarter of 2020. Frenzied buying of EV stocks has lifted the share price of NIO, pushing the valuation of the stock sky high. NIO’s current EV/Sales ratio stands at 14.86, higher than the industry’s 0.56.
Such is the euphoria for EVs that Nikola — which does not have much to show for itself in terms of saleable product and is not even making any revenues — briefly crossed Ford’s F market cap last month. Indeed, EV prospects look bright but the astronomic gains rather underscore the case for speculative bets.
FOMO Leading to EV Bubble
While EV manufacturers’ market capitalizations are either nearing or crossing that of legacy automakers, neither their financials are strong nor have they stood the test of time. Clearly, investors are just obsessed with the EV market. In fact, it’s the fear of missing out (FOMO) that is causing investors to bet heavily on these stocks. Investors are even ready to pay huge premiums on EV stocks.
Although the opportunities in the EV sector are abundant, the latest hype in the industry is a reminiscent of the dot-com boom in the 1990s. Many high-flying tech stocks that soared high during the dot-com boom eventually crashed, underscoring the fact that a stock cannot just endlessly run on hype and eventually goes into correction to reflect its true fundamentals.
Would the EV bubble also burst soon? Well, considering the lofty valuations of the aforementioned EV makers, any sharp pullback in the share price of those stocks would not come as a surprise. EV markets look promising, especially amid better-than-expected second-quarter vehicle deliveries from Tesla and NIO versus weak year-over-year sales of traditional automakers. However, the pace of electrification is debatable, considering supply chain disruptions caused by the coronavirus. Also, Tesla, NIO, Nikola and Workhorse are yet to prove if they can generate sustainable profits. All the four stocks carry a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While there is a lot of hot air pumping up in the EV industry currently, the stocks do appear over-inflated and the bubble might just be waiting to burst. So, it’s better to wait until the excitement subsides and grab the stocks at a better entry point.
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Ford Motor Company (F) : Free Stock Analysis Report
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