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Boom or bust?
3 years ago
Elon Musk has overseen Tesla's rise to the most valuable car company in the world
Later, in 2015, I wrote part of the analysts’ report on the Ferrari IPO for a major US investment house, in which we disagreed with the late Sergio Marchionne’s contention that Ferrari should be valued like a luxury brand rather than a capital-intensive car manufacturer. Turns out Sergio was right, of course. I didn’t buy, he got the $10bn valuation he was after (we said $4-6bn, tops) and the $52 initial price is now over $300 as I write, with investors seeing Ferrari not as a passion-punt but as a sober defensive stock, even at that value, able to iron out the vicissitudes of the global economy with its brand power and brilliant demand management.
In my defence – if you’re still reading – these decisions were influenced by the fact that for decades the car industry was a terrible place in which to invest. Public companies ought to be run to deliver shareholder value, but ordinary shareholders like us were pretty far down the list of priorities for a lot of big names for a long time. Instead, car companies were often run for the glorification of the individuals or families who controlled them: the Agnellis, the Porsche-Piechs, the Fords, the Quandts and others. Regardless of ownership, many chased volumes for bragging rights rather than profits, and ended up with huge overcapacity and vast amounts of capital wasting away, locked up in inefficient plants they couldn’t sell. Product development was often glacially slow. In some cases, governments and unions dictated direction as much as the CEO. In the US, General Motors in particular became a pension- and healthcare-provider with a struggling carmaker attached thereto.
"Tesla's stellar if wildly fluctuating valuation has encouraged a raft of more recent EV start-ups to go public via special-purpose acquisition companies (or SPACs) before they've even made a car, let alone a profit"
Much – but not all – of that has changed. The existential risk posed by electrification has prompted the existing carmakers to examine more than just how they power their cars, and sort out the stuff they’ve always known they should: they’re better investments as a result. You can invest directly in Chinese carmakers such as BYD, Geely and Great Wall (all rated ‘outperform’ by Bernstein) if you have access to the Hong Kong bourse, or Li Auto, XPeng and NIO, which are listed in the US. And Tesla’s stellar if wildly fluctuating valuation has encouraged a raft of more recent EV start-ups to go public via special-purpose acquisition companies (or SPACs) before they’ve even made a car, let alone a profit.
So instead of only having a choice of a few hidebound and poorly managed ‘legacy’ carmakers in which to invest, it’s now like the Wild West out there. Just last week, as I write, Vietnamese EV maker VinFast was briefly valued at £190bn after it listed on the NASDAQ via a SPAC: more than Volkswagen, GM and Ford combined, despite the fact that it only expects to deliver 50,000 cars this year. That mad spike was exacerbated by the fact that only one per cent of its shares are traded, and by the end of the week it was down to ‘just’ $68bn, a slide which the experience of its peers suggests may continue.
“Or you could just stick to what you know, and put some money into carmakers you've actually heard of that do old-fashioned things like build high-quality cars in large numbers, distribute them globally, make profits and pay dividends, however quaint that might sound”
If you plan to invest in one of these new entrants, maybe it’s the old gambling adage you should bear in mind: only bet money you can afford to lose. Even the more mature start-ups are struggling to hold investors’ confidence: Rivian is delivering clever, well-reviewed electric trucks, has a deal to supply Amazon with delivery vans and is run by grown-ups, yet its share price has slumped from a high of around $130 after its IPO to around $20 for most of this year. It’s a similar story at Lucid, Fisker and Faraday. The financial shenanigans at the latter make for pretty eye-widening reading: the level of due diligence and disclosure required for a company to reverse into a stock market listing via a SPAC is considerably lower than for a conventional IPO. Lordstown Motors made its SPAC listing in 2020 when it was barely a year old and has already gone bankrupt, despite deals with GM and iPhone manufacturer Foxconn.
If all that sounds too risky for you, you’d probably be right. There are other ways into investing in electrification though, the easiest probably being funds such as Blackrock’s Future of Transport or Wisdom Tree’s Battery Solutions ETF (exchange-traded fund). Neither is focussed solely on automotive, but like any actively managed fund they’ll spread your exposure across a bunch of investments, often in smaller suppliers you might not have discovered alone, and give you access to fast-growing companies such as battery maker LG Energy Solutions, which is listed on the Korean bourse and is difficult to buy into as an overseas private investor.
Ben advises sticking to well-established companies such as Carlos Tavares' Stellantis
Or you could just stick to what you know, and put some money into carmakers you’ve actually heard of that do old-fashioned things like build high-quality cars in large numbers, distribute them globally, make profits and pay dividends, however quaint that might sound. For a while, investors worried that the big tech companies would eat the established carmakers’ lunches, either monopolising the software that controlled increasingly autonomous cars and the data they generated, or designing and branding whole cars themselves, which the existing carmakers might be lucky enough to build for them.
That clearly isn’t happening, yet many of the existing carmakers are still priced like it is, despite them having convincing, deadlined electrification plans and having sorted out other aspects of their businesses too. Challenges remain: from new rivals, from further supply chain shocks, from slowing global demand and the difficulty of making electric cars as profitably as petrol ones. You’ll know which excites you most, but the analysts currently favour Stellantis, GM and Mercedes-Benz to deliver some capital growth.
For me, Mercedes-Benz is maybe the most exciting of these: demerged from its truck business, with a plan to go all-electric by 2030 and radically upmarket, dropping its smaller and less profitable models and paying a six per cent dividend this year, it feels like the market is still undervaluing it. It’s the largest single holding in my own portfolio; let’s see if I’ve finally got it right this time.
