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Are EV Stocks in a Bubble? 2 Cautionary Tales Investors Should Know

2020-07-24 15:30

Are EV Stocks in a Bubble? 2 Cautionary Tales Investors Should Know

This isn't the first time we've been promised an automotive revolution.

Electric-car stocks have taken off like a bolt of lighting in recent months.

Shares of manufacturers including Tesla (NASDAQ:TSLA)Nikola (NASDAQ:NKLA)NIO (NYSE:NIO), and Workhorse (NASDAQ:WKHS) have all at least tripled since the beginning of the year, and have delivered even bigger gains to those savvy enough to get in during the market crash in March.

Tesla, now the most valuable carmaker in the world, has led the sector higher, and its market cap around $300 billion dwarfs those of traditional auto stocks. A number of factors appear to be pushing Tesla and its peers higher. An excitement around increasing vehicle deliveries, even during the pandemic, a global push toward renewable energy, and bullish momentum across much of the stock market has lifted the sector to new heights.

But is the recent growth really sustainable, or is this just a euphoria-driven bubble inflated during one of the most precarious times for the global economy since the Great Depression? While the EV revolution could just be getting started, investors should be aware of what happened with similar revolutionary technologies in the auto sectors in recent years. Keep reading to see two sobering stories.

A red Tesla 3 on the highway


1. Natural gas fuels

Natural gas prices plunged in the aftermath of the 2008-09 Great Recession as the fracking boom in the U.S. led to a surge in supply. Industry operators began to see natural gas fuels as an alternative to gasoline and diesel. Natural gas fueling stations, primarily designed to service municipal vehicles like buses and sanitation trucks, as well as some long-haul trucks, began popping up around the country, led by innovators like Clean Energy Fuels (NASDAQ:CLNE). The T. Boone Pickens-led company owned a network of natural gas fueling stations, and business was booming in the early 2010s. The same was true for Westport Fuel Systems (NASDAQ:WPRT), a maker of natural gas engines for trucks. As the chart below shows, both stocks soared from the depths of the financial crisis through the spring of 2012 as natural gas prices fell to $2/mmBTU (million British thermal units).

WPRT Chart


However, March of 2012 would prove to be the peak for both stocks as natural gas prices began to rebound, doubling over the next 18 months. Additionally, hopes for Congress to pass legislation encouraging alternative fuels, then known as the NAT GAS Act, never materialized. The recovery in natural gas prices, which were unsustainable for producers at below $2/mmBTU, killed the momentum in the sector. Here's what's happened to those two stocks since.

WPRT Chart


The natural gas revolution fizzled and these stocks crumbled. Investors moved on, and EV stocks appear to be their latest fixation.

2. Self-driving cars

Just a few years ago, self-driving cars seemed to set to take over the world.

In 2016, Business Insider Intelligence and others predicted that there would be 10 million autonomous vehicles (AVs) on the road by 2020. Many foresaw a future where self-driving cars would be viable by this year, with the technology reshaping the way we live and work over the next decade. A number of automakers said they would have full-self-driving vehicles available by 2020.

Investors, agog at the potential in what Intel (NASDAQ:INTC) called a $7 trillion opportunity, pumped up Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) to high-flying IPOs. Intel acquired AV technology company Mobileye for $15.3 billion in 2017, and General Motors (NYSE:GM) saw the value of its Cruise AV soar to $19 billion thanks to multiple funding rounds from Softbank, the prolific start-up investor.

Tesla stock owes at least of part of its gains to the company's Autopilot technology, which CEO Elon Musk has often touted, and Morgan Stanley gave Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Waymo, which is widely considered to be the leader in AV technology, a $175 billion valuation in 2018.

Compared to expectations just a few years ago, autonomous vehicles have been a clear disappointment. During a global pandemic that calls for automation of almost any kind, self-driving vehicles aren't even part of the conversation. The technology hasn't lived up to the hype, and, despite billions invested in lidar, sensors, cameras, and other technologies, as well as millions of autonomously driven road miles, the problems that need to be solved for AVs to be safely driven in standard conditions have proven to be more difficult than expected. A fatal accident involving an AV Uber hitting a pedestrian in March 2018 seemed to crystallize this, and delivered a substantial setback to Uber's self-driving ambitions as well as those of its peers.

By late 2018, it was becoming clear that the technology couldn't live up to the accelerated timetable so many had believed in. Waymo CEO John Krafcik said it would "take longer than you think" for EVs to be ubiquitous. Tesla's grand plans, including a cross-country AV trip, have also been delayed multiple times.

Morgan Stanley slashed its Waymo valuation from $175 billion to $105 billion in 2019, and this March, Waymo raised $2.25 billion at a valuation of $30 billion, effectively showing that the autonomous-vehicle revolution is still years away. You can assume the air has come out of similar self-driving technology valuations, including GM, Uber, and Lyft.

You say you want a revolution

Just because the natural gas revolution flopped and self-driving cars were overhyped, that doesn't mean electric vehicles won't go mainstream. Tesla has certainly made a viable product that's in high demand, and concerns about climate change are increasing.

However, these stocks have soared to such high valuations that the whole sector now seems priced for perfection, much like self-driving cars were a few years ago. Tesla's market cap alone exceeds that of GM, FordFiat Chrysler, Honda, and Volkswagen combined, and Nikola's briefly topped that of Ford and Fiat Chrysler. The fate of natural gas fuels and self-driving cars should remind EV investors that it would only take a shift in market fundamentals or underestimated technological challenges for an unraveling in these stocks.

Alternatively, the potential election of Joe Biden as president could unlock further momentum for EVs in the U.S., and Europe seems poised to pass a $2 trillion coronavirus recovery package that would boost the renewable energy sector. China, which is both the world's largest car market and EV market, already has a number of EV-friendly policies in place. Meanwhile, the coronavirus pandemic is squeezing oil and gas companies, which may add to calls that the fossil fuel industry isn't sustainable, both on a financial and an environmental basis.

We'll learn more about the EV sector's potential when Tesla reports second-quarter earnings after hours on Wednesday. Look for Tesla and its peers to swing big one way or the other on the news, as investors have big expectations for the premium EV maker.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Ford. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Tesla. The Motley Fool recommends Clean Energy Fuels, Intel, and Uber Technologies. The Motley Fool has a disclosure policy.

Why I Sold Some of My Tesla Stock

The recent run-up in its stock price had one Fool trimming his position.

I'm a buy-and-hold investor at heart who likes to let my winners run. That means I usually don't sell stocks after a big run-up since I'm banking on even greater gains in the decades ahead. However, that's not a rule set in stone but more like a guideline. If a stock soars to an uncomfortable level, I will sell.

That's exactly what I did with a portion of my Tesla (NASDAQ:TSLA) position earlier this week. Here's why I decided to cash in on some of my Tesla stock.

Money and a stock price chart.


Sizzling stock price performance

Shares of Tesla are up a dizzying 261% this year and nearly 500% over the past 12 months. That monster rally has pushed the company's market value up to more than $280 billion. That makes it the most highly valued car company in the world by a long shot as it's worth roughly $100 billion more than its next largest rival Toyota (NYSE:TM). It's also now light years ahead of other leading car manufactures like Ford (NYSE:F)GM (NYSE:GM), and Fiat Chrysler (NYSE:FCAU).

TM Market Cap Chart


Strip out Toyota, and Tesla's valuation is almost more than the combined value of the rest of its competitors.

That sky-high valuation comes even though it only delivered about 90,000 cars during the second quarter. For comparison, Toyota sold more than 148,000 vehicles in North America alone during June and 347,500 units overall that month. It's also worth noting that Toyota makes a lot of money -- it projects to generate $4.66 billion in operating profit this fiscal year despite the COVID-19 impact -- while Tesla only made a small $16 million profit during this year's first quarter.

On the flip side, Tesla does boast having a higher gross profit margin (20% in the first quarter vs. 17% for Toyota and less than 10% for the big three U.S. automakers). That should drive fast-paced profit growth in the coming years as the company ramps up vehicle production. Still, investors are more than pricing in this future upside into the current valuation. That has started making me uncomfortable with my position, especially as Telsa grew into one of my largest holdings.

Even Elon Musk thinks the stock value is crazy

Most CEOs believe the market has undervalued their stock. However, that's not the case with Tesla CEO Elon Musk. Back in May, he tweeted that "Tesla stock price is too high imo." At the time, shares were around $700 apiece. It has gone on to more than double from that price in just the past month and a half.

Meanwhile, an analyst recently put out a bullish report on Tesla by more than doubling the research firm's price target on the stock from $939 a share to $2,322 per share. In response to the report, Musk tweeted, "wow." While Musk's comments could be for show, he does seem surprised by how much the stock has run-up in the past year.

To Musk's remarks into perspective on his view of the company's value, he tried to take Tesla private at $420 per share in August of 2018. That seemed like a stretch price at that time since shares were in the lower $300's, but that price was closer to where Musk valued the company based on Tesla's future potential.

With even the CEO thinking the stock has become wildly overvalued due to what seems like an overly optimistic outlook on what's ahead, I felt that now was a good time to take some money off the table.

Letting the rest run

There are many reasons to sell a stock. In this case, I wanted to rebalance my portfolio after Tesla became an outsize position following this year's scorching hot run.

However, because I'm not an all-or-nothing kind of guy, I didn't sell my entire Tesla stake. Instead, I cashed in on enough shares to feel more comfortable holding the rest through the future ups and downs. If the Tesla bulls are right, then I'll still be along for the ride. Meanwhile, if shares dive, that drop won't have an outsize impact on my portfolio's performance.


Matthew DiLallo owns shares of Ford and Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

Why Tesla Stock Fell Sharply Thursday

Following a huge run-up, the electric-car maker's stock is taking a breather.

What happened

Shares of Tesla (NASDAQ:TSLA) fell sharply on Thursday morning, declining about 5% shortly after the market opened.

The stock's slide is likely due to an analyst's move to reiterate a sell rating on shares.

Tesla Model X in a garage with its falcon wing doors open


So what

Citigroup analyst Itay Michaeli boosted his 12-month price target for the growth stock by more than 80% on Thursday. This is in response to Tesla's recently reported strong second-quarter deliveries, as well as operating expenses in 2020 that may be lower than his initial estimates for the year.

But here's the catch: The new price target sits about 70% below where shares are trading now. Michaeli gave the stock a price target of $450, up from $246 previously. But shares are sitting not far from $1,500.

There's a "lack of evidence" to substantiate the stock's nearly 500% run-up over the past 12 months, the analyst says. In particular, he questions whether demand will continue to rise rapidly in this environment, and if emerging competition may be more of a threat than investors anticipate.

Now what

Investors will likely get a timely window next week into how demand for Tesla's vehicles is faring. The automaker reports second-quarter results after market close on Wednesday, July 22.

In its quarterly updates, Tesla typically provides commentary on the trajectory of its vehicle order volume and its full-year outlook for deliveries. Both of these tidbits will help give investors a better idea of how much demand the automaker is seeing.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

3 Industries I'm Avoiding Like the Plague

No amount of free money could encourage me to buy stocks in these industries now, or for the foreseeable future.

This has been a truly wild year to be an investor. During the first quarter of 2020, Wall Street and investors endured the swiftest bear market decline in history. But by the second quarter, they were privy to the strongest quarterly move higher since 1998. These baffling moves come courtesy of the uncertainty tied to the COVID-19 pandemic.

There's no question that there will be clear long-term winners of the pandemic, but some industries should be slapped with caution tape. Despite their popularity in recent weeks or months, I'm purposely avoiding the following three industries.

A Tesla Model S plugged in and charging.


Electric vehicles

If you thought cloud computing, cybersecurity, and telemedicine were hot industries, feast your eyes on electric vehicle (EV) manufacturers. On a year-to-date basis (through July 14), Tesla (NASDAQ:TSLA) is up 263%, NIO (NYSE:NIO) has gained 251%, and Workhorse Group has galloped higher by 443%. Meanwhile, Nikola (NASDAQ:NKLA) and Tortoise Acquisition have more than quadrupled and doubled, respectively, in the past three months.

There's little doubt that EVs represent the future of the automotive world. But one thing is for certain -- they aren't the present. Despite the hype, EVs represent only around 2% of total U.S. sales, even though plug-in EV sales surged by at least 20% every year between 2012 and 2018, save for 2015. On a global basis, they represent about 2.2% of total auto sales.

It's going to take a long time before EVs become staples on the roads in developed countries. Similarly, ensuring that adequate infrastructure is in place to meet the needs of a growing plug-in EV fleet isn't going to happen overnight.

However, companies like Tesla, NIO, and Nikola are being priced as if everything will go off without a hitch and that the transition to EVs will be complete in five to 10 years. The adoption of every new technology over the past quarter-century suggests that this isn't going to be the case. There are always hiccups in the adoption and development process, and changing the buying habits of consumers takes a long time.

When I look at the EV industry, I see:
  • Tesla: A company that still hasn't produced a generally accepted accounting principles (GAAP) profit, and is producing a fraction of the vehicles Toyota cranks out on an annual basis, yet is somehow the most valued auto manufacturer in the world;

  • NIO: A Chinese EV producer that abandoned its opportunity to build its own vehicles in 2019 and is still trying to secure additional financing; and

  • Nikola: An EV truck producer that doesn't have a dime in sales to its name, yet is rivaling Ford in market cap.

If you ask me, it's all lunacy, and it's an industry I'm staying far away from.

Diners eating and sharing plates at a table full of food.



I'm socially distancing myself from the casual dining space. While there are clear winners that I wouldn't dare bet against, like pizza powerhouse Domino's, the industry is otherwise full of businesses with growth strategies that COVID-19 has completely undercut.

The issue for restaurants is twofold. First, the longer the pandemic continues, the more consumer behavioral habits could change. Eating at home or relying on takeout or delivery services could become the norm, potentially hurting the profitable in-store dining experience.

Second, restaurant chains often rely on debt to finance expansions. This has left some highly indebted restaurant chains, like Bloomin' Brands (NASDAQ:BLMN), the company behind Outback Steakhouse and Bonefish Grill, in potentially precarious situations. Bloomin' ended the first quarter with over $2.9 billion in total debt and had around $400 million in cash. However, the company is expected to lose a significant amount of money in 2020 and is no lock to make money in 2021.

But it isn't just dine-in chains that I worry about. Fast-casual chain Jack in the Box (NASDAQ:JACK) has a particularly strong presence in southwestern states. We've already seen California Gov. Gavin Newsom roll back indoor dining privileges to curb the spread of the novel coronavirus. Meanwhile, cases of COVID-19 are spiking in Arizona, and Nevada has the highest unemployment rate among the 50 states. Jack in the Box is not well-positioned to thrive during the pandemic, even with a model that would seem to encourage takeout and drive-thru.

I'm not even a fan of restaurant chains that are thriving. Chipotle Mexican Grill (NYSE:CMG), for example, is up 32% year to date, as its fresher foods and delivery partnerships continue to resonate with consumers. But this rise doesn't mask the fact that Wall Street's 2020 earnings-per-share estimates are down almost 25% from where they were three months ago, or the fact that the company is valued at 58 times next year's forecast earnings. This is a food company, not a tech stock. A forward valuation this aggressive makes little sense in the current environment.

A woman holding her luggage while looking at a digital arrival and departure board in a transportation hub.



I've saved the best of the worst for last: the airline industry.

There's perhaps no industry that COVID-19 has brutalized more than airlines. At the trough in early April, passenger traffic in U.S. airports had fallen 96% from the prior-year period, as measured by Transportation Security Administration screenings.

There are many reasons I want nothing to do with airline stocks now or in a post-pandemic environment.

They face the same uncertain long-term future as restaurants. The longer the pandemic persists, the more folks might choose road trips or other means of travel that don't subject them to the possibility of infection or the inconveniences associated with flying.

The airline industry is also a capital-intensive, low-margin business. Recessions and economic contractions are inevitable parts of the economic cycle, yet airlines have repeatedly shown that they're ill-equipped to survive any but the most minor of these normal contractions.

Airline stocks also tend to lean heavily on debt financing to modernize their fleets and fund expansions. American Airlines Group (NASDAQ:AAL) is the poster child for debt mismanagement. At the end of March, American Airlines had close to $3.6 billion in cash and cash equivalents and a whopping $34.1 billion in total debt. Even with lending rates at historic lows, American recently floated the idea of raising $3.5 billion at a ghastly interest rate of 12%. Time and again, debt financing gets the airline industry in trouble.

But maybe the biggest issue with the airline industry is the new lack of share repurchases and dividends. As part of accepting Coronavirus Aid, Relief, and Economic Security (CARES) Act funds for distressed industries, major airlines are now barred from buying back their stock and paying dividends. Buybacks and dividends might have been the only aspects of airline stocks that made owning them tolerable; it certainly wasn't their margins or balance sheets.

With COVID-19 clipping the wings of airline stocks, it's an industry I'm pretty convinced I'll never buy into.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Tesla. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

Tesla May Temporarily Shut Down Its California Factory Soon; Should Investors Worry?

Not due to the COVID-19 pandemic, though -- this rumored shutdown is all about speeding up Model Y production.

While the possibility of Tesla (NASDAQ:TSLA) building a new factory in Texas is gaining traction, the automaker is also focused on its current U.S. facility in Fremont, California., a website that follows the electric transportation industry, is reporting that in addition to the company being in the process of upgrading the factory, it's also likely to shut down the factory temporarily -- possibly by the end of July -- as it prepares to open a new assembly line there.

According to Electrek, the focus of the upgrades will be to increase Model Y production capacity, an expected move considering that the website reported (based on a leaked email) in June that Elon Musk had told employees that the Model Y is "the top priority for both production and manufacturing engineering."

A closed sign in a shop window.


Since Tesla hasn't provided any direct commentary about the plant's shutdown, it's not entirely clear why it's electing to upgrade the facility now, and why it didn't choose to do so when it had to suspend operations back in March and April during the state's coronavirus lockdown. It's possible that Tesla might have intended to complete the upgrades at the time, but couldn't due to an inability to source the necessary equipment and supplies.

It is curious, though, that the company is planning the upgrades now, considering how the pandemic may be impacting it in other ways. On Tuesday, Electrek reported that it had "obtained internal data from Tesla showing that the automaker has had over 1,550 employees "affected" by COVID-19 cases."

Should Tesla shut down the Fremont factory for a few days or a week, investors won't need to reach for a red flag. However, if the closure is extended, it may suggest that there are causes for concern that transcend the plant upgrades.

Scott Levine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.