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- EV (electric vehicle) makers including Tesla, NIO, and Nikola have surged this year. The rise in stock prices has led to astronomical valuations for these stocks.
- This year, stock markets have found a new love for EV makers. However, surging valuations should raise alarm bells. The surge in EV makers’ stock prices is reminiscent of the dot-com boom in the 1990s.
NIO, Nikola, and Tesla
So far, EV makers have been astonishing 2020. Based on the closing prices on June 14, Tesla (NASDAQ:TSLA), NIO (NYSE:NIO), and Nikola have risen 123%, 52%, and 520% in 2020. Last week, Nikola’s market capitalization rose above Ford’s (NYSE:F), while Tesla’s market capitalization rose above Toyota’s. Tesla’s market capitalization beat Volkswagen earlier this year.
While EV makers’ market capitalization beat legacy automakers, there isn’t any comparison when it comes to their financials. Nikola isn’t making any real revenues, while NIO generated negative gross margins in the first quarter of 2020. Meanwhile, Tesla hasn’t posted an annual profit yet. Since markets have been obsessed with the EV industry, they don’t pay attention to financials.
NIO and Tesla
There are opportunities in the EV industry. Markets like to look forward and EVs look promising in the future. However, the pace of electrification is debatable. From a financial perspective, NIO expects to improve its financial performance this year. The company expects positive vehicle gross margins in the second quarter. NIO expects the gross margins to rise to double digits by the end of the year.
Before the pandemic, Tesla expected to sell half a million cars in 2020. The company has been building new factories in a frenzy, which points to strong demand. Meanwhile, Nikola has $10 billion in orders.
Do EV makers see their stock prices as high?
Earlier this year, Tesla CEO Elon Musk said that he thinks that the share price is too high. The company raised cash by selling shares. Tesla had categorically denied the possibility during its earnings call for the fourth quarter of 2019. Earlier this month, NIO also issued shares and eventually sold more shares than initially planned. While the capital raise would help NIO bridge the cash burn, it also shows that EV makers have been capitalizing on rising stock prices.
Is this the new dot com boom?
In the 1990s, tech stocks soared during the dot-com boom. However, the bubble burst and most high-flying tech stocks at the time went into oblivion. Is the rise in Tesla, NIO, and Nikola in 2020 reminiscent of the dot-com boom? In an otherwise slow-growing global economy, the EV industry is among the few sectors that offer astronomical growth prospects.
Tesla and NIO to see high growth
The problem is how much to pay for growth. Companies like NIO and Tesla can’t be valued like traditional automakers. Currently, investors are willing to pay a very high premium for EV makers. While the rally in Tesla, NIO, and Nikola meets the definition of a bubble, betting against the markets hasn’t been a profitable strategy either. Tesla short-sellers know what it means to bet against the stock this year.