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Tesla And Rivian Stocks: Is There An EV Bubble?

The EV stock hype is at a peak, and names like TSLA and RIVN are among the most discussed online. Wall Street Memes wonders if some automaker stocks are at risk of crashing and burning.

Impressively, Tesla TSLA is now worth $1.1 trillion, quite a bit more than the sub-$100 billion valuation of traditional automakers GM and Ford. Tesla is by far the most valuable auto company in the world, even though its vehicle production is significantly smaller than its legacy peers’.

Alongside Tesla stock’s rise, Rivian’s  (RIVN) - Get RIVIAN AUTOMOTIVE, INC. Report recent IPO showcased investors’ appetite for EV stocks, and the young company was worth over $100 billion at one point. Now, as share prices in the sector dip, many begin to question whether the stratospheric market cap numbers make sense for an electric vehicle industry that is still in such an early lifecycle.

Figure 1: Rivian's R1T vs. Tesla's Cybertruck.

Figure 1: Rivian's R1T vs. Tesla's Cybertruck.

Valuation: TSLA vs. traditional automakers

Tesla is among the top ten largest market caps in the world today. More than that, it is the one that trades at the highest price-to-earnings multiple: 360x, five times more than runner-up Amazon  (AMZN) - Get Amazon.com, Inc. Report. Early in 2021, Tesla’s P/E ratio reached a whopping all-time high of 1,100x.

Figure 2: Tesla's price-to-earnings ratio history since 2017.

Figure 2: Tesla's price-to-earnings ratio history since 2017.

Rivian, on the other hand, went public on November 9 at a target valuation of $78 billion. Market cap topped $100 billion after the company’s share price increased 70% in the first four trading days. Worth noting, Rivian has an order backlog in place, but it has generated zero revenues so far. So, one might sarcastically say that RIVN’s P/E is infinite.

When it comes to legacy automakers, the numbers are much less impressive. Toyota  (TM) - Get Toyota Motor Corp. Sponsored ADR Report, valued at $258 billion and second most valuable in the auto industry, currently trades at a modest P/E ratio multiple of only 5. This is the same multiple of Volkswagen (VOW3.DE), the fourth most valuable automaker at a market cap of $132 billion.

Figure 3: Largest automakers by market capitalization.

Figure 3: Largest automakers by market capitalization.

Toyota and Volkswagen have the highest car production. Toyota makes 10.4 million vehicles and Volkswagen produces 10.3 million. Tesla delivered only half a million vehicles in 2020. In 2021, the company achieved an annual run rate of 1 million electric cars per year at the end of last quarter.

Tesla’s equity is valued at an astounding $2.2 million per car produced, considering 2020 production, or a still elevated $1.1 million using the most recent production run rate figure. Meanwhile, Toyota is worth only $24,800 per car produced, and Volkswagen is valued at $12,800 per vehicle sold.

The evolution of the EV market

When it comes to electric vehicles produced worldwide, Tesla is the major player with a market share of 15%. Volkswagen and General Motors  (GM) - Get General Motors Company (GM) Report come in second and third. In the U.S, Tesla’s market share has been shirking since 2019, although EV registrations have increased sharply in 2021. See below.

In 2020, the electric car industry size was $246 billion. Third party research firms expect this number to grow to $1.3 trillion by 2028, at an impressive CAGR of 24%.

Figure 4: U.S. electric new vehicle registration share by brand.

Figure 4: U.S. electric new vehicle registration share by brand.

Is there an EV bubble?

The EV industry is one of the most hyped in the market. Judging by the numbers presented above, EV stocks are priced based on growth potential and for the possibility that the companies may become game changers in the automotive industry.

In an era of speculation headlined by crypto, NFTs and SPACs, investors seem willing to overlook fundamentals and focus on the far-out potential. While few would claim that the electric vehicle space is a fad, it would not be a stretch to say that the sector has been propelled forward by this speculative wave as well.

Tech bubble similarities

The dot-com bubble of the late 1990s was driven by high expectations as well. Back then, investors kept buying into over-inflated internet stock prices for years, during a period of early adoption of the new technology. The frenzy drove the Nasdaq to be valued at a P/E of 200x.

It is hard not to wonder if something similar might happen to the EV market now. Jim Cramer, recently warned about demand for EV stocks like Lucid Motors  (LCID) - Get Lucid Motors Report and Rivian being fueled by momentum, not by the technology or growth opportunities per se. Cramer also said:

“The dot-com bulls were right about what the future would look like. But they were way too optimistic about the timing.”

Twitter speaks

If you were to buy one of the three EV stocks below and hold it for 12 months, which would be your top pick?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)