A Blog by Jonathan Low


Nov 20, 2021

How Come Electric Vehicle IPOs Have Such Stratospheric Valuations?

How to explain the market value of companies with few, if any, revenues, frequently no product beyond a prototype - but valuations that exceed those of Ford and GM

The only - dare we say 'logical?' explanation is FOMO - fear of missing out - again - after Tesla went from $1 billion to $1 trillion. That no one is likely to surpass both the first mover advantage or Elon Musk's personality (can anyone even name the founders of Rivian, Lucid or Nikola?) does not seem to be a deterrent, which is perhaps why there is a growing belief that there is too much money chasing too few ideas. JL

Aaron Gordon reports in Motherboard:

There is a sense of FOMO for those who didn’t get in on Tesla when it first went public in 2010 at a valuation of “just” $1.6 billion. It is now worth more than $1 trillion. Thanks to Elon Musk’s personality effect on Tesla stock, EV stocks operate in some alternate sphere of economic reality, where companies with no revenue and no product sell stock worth billions of dollars based solely on the potential that one day they will compete with and possibly even displace some of the most recognizable brands in the world.

Imagine a financial advisor presents two companies for you to invest in. They both make a very similar product. Company A has been around for close to a century, makes millions of those products a year, sells them all over the world, and has had healthy profit margins for the last decade. Company B has been around for a few years, has sold a few dozen of those products so far in one country, has billions of dollars in debt, and doesn’t expect to be profitable any time soon. 

Obviously, Company A looks a lot better on paper. But here comes the kicker: Your financial advisor tells you Company B’s stock is actually worth more. 

If this sounds crazy to you, welcome to the electric vehicle stock market.  

While the stock valuations of electric vehicle, or EV, companies have always been difficult to parse, thanks in large part to Elon Musk’s personality effect on Tesla stock, it’s been clear for some time EV stocks operate in some alternate sphere of economic reality, where companies with no revenue and no product somehow sell stock worth billions of dollars based solely on the potential that one day they will compete with and possibly even displace some of the most recognizable brands in the world. 

“This is pure magic,” Peter Atwater, a former financial advisor who now teaches confidence-driven decision-making at William and Mary, told Motherboard. “People are investing in dreams.” There is a palpable sense of FOMO for those who didn’t get in on Tesla when it first went public in 2010 at a valuation of “just” $1.6 billion. It is now worth more than $1 trillion (yes, with a “T”). And now they don’t want to miss again. 

This became especially obvious in 2020, when a number of EV companies with no revenue or products went public through special purpose acquisition companies, or SPACs—a questionable but increasingly popular backdoor to the stock market—and received valuations in the billions. At least two of these SPAC specials have since been investigated by the Department of Justice: Nikola’s founder, Trevor Milton, he of the truck-rolling-downhill fame, has been indicted for fraud, and Lordstown Motors Corp. is under investigation.


EVs have become so fashionable that completely unrelated companies are trying to cash in on the hype. A few weeks ago, the lingerie company Naked Brands, a former stock market darling that used to be worth some $800 a share thanks to a meme-stock moment but in recent years has been hovering around 70 cents, essentially turned itself into a SPAC and merged with a small EV startup called Cenntro that, according to the deal, expects to grow at an annual rate of merely 630 percent (in this one case, investors weren’t buying it, as the stock is still worth about 67 cents). 

But, in recent weeks, it’s become even more clear just how hot the EV market is. Last week, Rivian, a high-end consumer EV-and-delivery-truck startup backed by companies like Amazon and Ford, went public with a valuation of over $100 billion, the biggest IPO of the year so far. It was no surprise Rivian was so highly valued. It's long been hyped as one of the most promising of the EV startups in the industry, even though its only consumer vehicles start at more than $70,000. Despite a 15-percent dip yesterday, Rivian’s stock continues to have a valuation greater than all of the established automakers like General Motors and Volkswagen, even though it produced only a few dozen vehicles and lost $1 billion in 2020 and $994 million in the first half of 2021.


Another company called Lucid Motors, backed by the Saudi Arabia Public Investment Fund, has similarly benefited from this EV stock explosion, SPAC’ing in February. As of this writing, its market cap is some $85 billion, putting it right up there with General Motors. Lucid makes one car, the Lucid Air, but it won MotorTrend’s 2022 car of the year award, the first time any automaker has won this with its first car. However, it is worth noting it has sold only a few hundred of them and the car starts at $169,000.

It is perfectly fine—good, even—to get excited about new companies that make good products people want to buy, especially products that will be better for the environment than what people currently use. But it is difficult to explain based on normal business principles why two luxury car companies are worth more than not just established automakers that make billions of dollars, but also other extremely profitable companies like CitiGroup.

To figure out what is going on here, Motherboard asked five experts in the electric mobility, investment, and financial services fields why EV stocks are worth so much money. 

Essentially, investors are making a giant bet that traditional automakers won’t survive the EV transition, argued Andrew Boyd, the founder of the venture firm Bramalea Partners. Boyd said, “If it’s truly a situation of ‘disruptive innovation’ then the legacy players won’t survive and therefore there is huge potential for new players like Lucid and Rivian.” (For his part, Boyd thinks investors are “jumping the gun” because it’s not clear to him the legacy car companies will be that bad at making EVs.)


In other words, the question boils down to whether the  “electric” or the “vehicle” part is hardest about building mass market EVs. Are EVs different products than gas cars? Do they have roughly the same overall market? Do EVs create an ability to monetize other aspects of car ownership gas cars previously didn’t or couldn’t? Does making gas cars for a century present any advantage whatsoever to making EVs? Or is it even a disadvantage as old habits die hard?

Not all the investors I spoke to agreed on the answers, but they broadly outlined the line of thinking that could lead an investor to believe Rivian is twice as valuable as Ford, which boils down to this: The entire automotive sector market share is essentially up for grabs. 

The fact that some companies like Ford, GM, and Volkswagen have been good at making internal combustion engines with their hundreds of moving parts for some 100 years, some argue, has little bearing on their competency in making EVs, which are in many ways entirely different machines dependent on a whole new suite of technologies (for example, they have advanced batteries and lots of complicated software but few moving parts). They do not envision Rivian and Lucid sharing the pie with GM and Ford, but eating it.

“The market loves pure-play EVs right now” and cares little about profit margins on pickup trucks and SUVs, said Reilly Brennan, a partner at Trucks Venture Capital. Brennan added that in his own opinion, making both internal-combustion-engine vehicles  and EVs over the next decade or so is an advantage, not a drawback, but investors are looking at the future through “a foggy telescope,” and “only considering future pure EV companies through their foggy telescope,” not through current realities.

Some investors also see EV-first companies like Rivian and Lucid as much more than car companies, which can be seen as an advantage. “New mobility firms like Rivian and Lucid are not only EV leaders but also digital leaders,” argued John Tough of Tough Venturing, a venture firm. “They were born in the digital age and have no legacy technical systems to weigh down their platforms. The EV driving experience is superior and cheaper [at least when it comes to mileage and maintenance costs]. And now the in-car entertainment and engagement is also superior to any incumbent automobile company. That combination should enable the new firms to win market share and create more value”” than original equipment manufacturers. 

Tough thinks a few legacy firms will “retain share,” specifically name-checking Ford, but expects most of them “are running an uphill race with a parachute behind them while EV-first firms are sledding downhill.”

Perhaps the most important question is not about what the future of EV companies like Rivian and Lucid hold, but whether or not these predictions about the automotive future bear any relation to what these companies are actually doing. Do the dreams Atwater referred to come from some kind of shared reality? Or are they invented out of virtually whole cloth? Could the same idea be applied to any combination of letters listed on the stock market, and be manipulated for instant wealth? And if it is indeed totally disconnected, why even spend any time talking about the practical aspects? Why even bother analyzing companies’ financials if the entire market is just a crowd of people pushing to get to the front of a line nobody even knows what for? These are the type of questions that can easily lead one down a rabbit hole of the history of financial markets, which suggests everything has always been a meme stock, because that’s what stock markets are.

For his part, Jim Cramer is on Team The Financials Don’t Mean Anything. “If you own Lucid or Rivian and you’ve made a ton of money, you have my blessing—right here, right now, tomorrow morning—to literally take half off the table,” he said, which is CNBC for you should sell your shares. “Remember, you’re playing momentum, not car companies and not technology, and in that case it’s better to ring the register early and often.”


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