It may seem unconventional, but analysts often find themselves drawn to companies that have yet to generate sales or earnings. The allure lies in the blank canvas that allows them to craft narratives around the potential market size and future prospects. One such example of this phenomenon is evident in the electric vehicle (EV) sector, particularly with Tesla taking center stage.
Rivian Automotive (ticker: RIVN) is one company that has successfully ventured into this uncharted territory. Back in November 2021, we delved into the story of Rivian during its initial public offering, specifically focusing on its potential in the U.S. truck and SUV market. At that time, the company aimed for a valuation of $64 billion, despite lacking immediate profitability to substantiate this figure. Financial analysts from FactSet do not anticipate full-year profitability for Rivian until 2028.
Surpassing expectations, the IPO ultimately priced 153 million shares at $78 each, boosting Rivian’s valuation to around $70 billion—exceeding the initial target. Shortly after, share prices soared to an impressive high of $179.47. Unfortunately, these glory days were short-lived as Rivian’s current valuation, inclusive of cash and debt, has dwindled to a mere $16 billion. Clearly, relying solely on promising narratives comes with inherent risks.
Recently, RBC analyst Tom Narayan initiated coverage on Lucid Group (ticker: LCID) stock, giving it a Hold rating and setting a price target of $6 per share. This puts Lucid’s valuation, including its debt, at approximately $14 billion. While Narayan doesn’t hold an overly bullish stance on Lucid, he recognizes the potential value in licensing the company’s EV technology to other automakers. In fact, this business segment alone could add a value of $15 per share or roughly $35 billion in market value.
In conclusion, the allure of companies without sales or earnings lies in the power of storytelling. The potential to disrupt markets and envision grand success can be enticing. However, caution must be exercised as valuations can quickly retract when faced with the harsh realities of the market. Lucid’s potential in licensing its EV technology may hold significant value, but only time will tell if this idea can transform into a profitable reality.
The Valuation Game: Lucid, Rivian, VinFast, and Tesla
When it comes to valuations in the automotive industry, there is a wide discrepancy between companies such as Lucid, Rivian, VinFast, and Tesla. While Lucid is valued at approximately 17 times its estimated 2023 sales and Rivian at around 4 times its sales, the reasons for this gap remain unknown. Ultimately, neither company has proven profitability to justify these valuations.
Interestingly, VinFast Auto stock (VFS) stands out from the pack with a valuation of roughly 22 times its estimated 2023 sales. However, this lofty valuation comes after a significant drop of over 80% in just a few days. The question arises: why? Well, the answer may simply be that the market operates on its whims.
In comparison, Tesla stock (TSLA) trades at nearly 9 times its estimated 2023 sales. However, what truly sets Tesla apart is its ability to turn a profit. In fact, the stock trades at approximately 53 times its estimated 2024 earnings per share. As a point of reference, the S&P 500 and Nasdaq Composite trade at roughly 18 times and 26 times, respectively.
Investors are left to wonder whether these valuations reflect excessive or insufficient pricing based on projected earnings growth. Analysts project that Tesla’s earnings will grow at an average rate of around 25% per year over the next three years. However, more optimistic estimates anticipate an annual earnings growth of 40% during that period.
It’s important to note that profitability plays a crucial role in shaping a company’s narrative. For example, DataTrek co-founder Nicholas Colas highlights Tesla’s dominant valuation in comparison to other car manufacturers. He argues that Tesla’s value stems from being the only automaker certain to thrive during the industry’s transition to electric vehicles. The promise of autonomous driving further adds to Tesla’s appeal. Undoubtedly, being a clear winner in an uncertain industrial landscape holds significant value.
This brings us back to Tesla’s 53 times earnings multiple, a figure that is intrinsically tied to its status as the leader in the electric vehicle market.
Investors cannot escape the need to speculate about the future, especially when it comes to startups aspiring to become the next Tesla. However, history has shown that aggressive projections often fall short of expectations. In fact, between 1990 and 2020, approximately 55% of all U.S. stocks performed worse than one-month Treasury bills in terms of compounded returns. This serves as a reminder that investors should place greater emphasis on earnings when evaluating new ideas.
In conclusion, the valuation game in the automotive industry is a complex one. While some companies like Lucid, Rivian, and even VinFast are still striving for profitability, Tesla stands out as the poster child for success. Its valuation reflects not only its past performance but also its potential for future growth. As investors grapple with these valuations, it is crucial to remember that predictions don’t always align with reality.