EV Revolution - A Peek Inside Wallstreet's Struggles

Psalm Chapter 27 verse 14 states, "Wait for the Lord; be strong and take heart and wait for the Lord."

Waiting, hmmm, not one of my strongest suites. In fact, as I get a little older here, I recognize that my impatience is manifested in outbursts of frustration versus clearly unfolding moderate forms of being impatient. The irony is that going through adversity is where most growth occurs, so learning to be patient is something that I continue to strive for. God's plan is wiser than my selfish tendencies for sure, so aligning with His word as a guide for my life is critical. It isn't easy, so I like the encouragement offered by the Psalmist to be strong and take heart.

When it comes to investing, patience is also key. When I think about some of the greatest investment opportunities over the past 20 years, everyone one of them has faced intense scrutiny and second guessing. Patience can also be thought of as self-denial. Not self-denial to inflict pain or suffering, but rather to restrict emotions in order to make a more rational decision. This is why we are in such an intense information warfare period - FUD is looking to rule the day.

This morning, Bernstein came out with some thoughts on Tesla, Inc. (TSLA) and their struggles with valuation. For me, there's one thing clear, a lot of investors are going to miss the boat if they continue to think in a conventional mindset. For the EV revolution, it is going to take two to five years for things to begin taking shape. That's not a long period of time, but when it comes to FUD, it can seem like a lifetime.

As I walk through the comments, they actually do a good job of addressing the thesis justifying the higher valuation for Tesla, and upcoming electric vehicle, EV innovators in Lucid Group (LCID) and Rivian Automotive, Inc. (RIVN). What it fails to do is consider the major risks that traditional automotive OEMs are facing. I find more and more that aggressive growth innovators are being attacked from the competitive risk front, but that rarely, is the same level of scrutiny placed on legacy/incumbent peers.

Pure play EV OEMs represent about 45% of the auto industry's market cap today, but just sell 1% of units.

While this is true, today, when comparing strictly 100% electric vehicle, EV technology, Tesla is actually dominating from an apples-to-apples comparison. It is futile to compare current technologies being 99% against the future, especially as the targets will shift. It is better to compare models such as the Mustang Mach-E, the Bolt, etc., versus other EV peers. This will better serve forecasting mid- and longer-term trends, but traditional OEMs are lagging so it doesn't paint a good picture.

The market believes that traditional OEMs will not be able to deliver competitive EV offerings in the future, or will be very delayed in doing so; and/or that the new EV upstarts will be able to generate significantly more profit per car, due to both direct distribution and autonomy/add-on services

I agree on all points here. These are important to consider for the long thesis for EV innovators.

The latter is a more credible thesis.

This is debatable. I won't get into details here too much, but China will become the dominant EV producer in the U.S. for smaller light duty vehicles as most major OEMs will look for the highest profit margin models. But it is very premature to assume that companies like Ford Motor Company (F) or General Motors Co. (GM) among others will be able to compete on battery technology and/or efficiency. This is especially true across all makes/models.

The automotive industry is an increasingly global and hypercompetitive industry and surplus profits and technology innovation will likely be competed away over time, as has been the case historically.

While this likely will remain true to a degree over the long-term, my contest here is that traditional OEMs will have severe risks associated with missteps that may set them back for 5-10 year periods - they are already a decade behind the curve. The lead of EV OEM innovators will not be something to scoff at, especially as most of the talent will continue to gravitate to innovators versus laggards. Who wants to work for an existing brand when newer brands like Tesla, Lucid and Rivian have such more upside potential....not many, especially amongst leading upcoming technology experts.

One could argue that Tesla may be a uniquely strong pure play EV vendor, given its brand strength and history of true technology innovation.

I agree on all points. There is much greater risk for companies like Ford and GM to convert existing models in the dozens to EVs. At the same time, current expectations will be redeveloped for EVs and may not fit consumer preferences, needs or be sustainable for expectations.

The struggle is with its valuation - 3-times the combined value of Toyota and GM, despite delivering 15-20-times fewer cars today

This continued debate on valuation is something that will not be ultimately determined over the mid-term, but should divulge important trends over the next couple years. If traditional OEMs are not successful in meeting innovator EV leaders' technology and efficiency, companies like Tesla, Lucid and Rivian are going to be easily justified in trading at much higher valuation multiples. The market is getting it right over the past few years, and all of the risk is on traditional OEMs to prove that they can execute (they haven't done this to date).

The last point I'll mention is that cannibalization is a huge risk for traditional OEMs. For those thinking that GM or Ford, among others are going to produce more EVs than non-EVs today, that's a stretch and remains to be seen. Being capable of producing battery technology for other OEMs to use is another stretch and remains to be seen. There are far too many OEMs today who will not be around in 20-40 years. Many of these will ironically be de-SPACed IPOs, but there will also be major traditional automotive OEM casualties. We are clearly in the first inning of the EV revolution, and Wallstreet and investors need to call what it is, an EV innovator's lead that remains to be contested.

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