Tesla (TSLA -6.42%) It has caused a storm in the market in just a few short years. Electric vehicle (EV) stock has risen nearly 2,000% in the past few years as the company has gone from being a cash-burner to leading the biggest automotive transformation in a century.
Electric cars are going mainstream, and Tesla is to blame, but the stock isn’t just because of the hype. The automaker posted strong revenue and profit growth. In Tesla’s first quarter, revenue jumped 81% to $18.8 billion, and operating income rose more than sixfold to $3.6 billion. Operating margin rose to 19.2%, ahead of any other major auto company.
Tesla’s success sparked a boom in electric car stocks, including traditional automakers like GM And stronghold, which focuses on electric vehicles. Indeed, there is no shortage of electric car startups that have been dubbed the “next Tesla,” including Rivian (countryside -2.33%)And Lucid (LCID -4.57%)And Nicola (NKLA -3.11%)And NewAnd BYD and Polestar, which will soon go public through the merger of SPAC with Joris Guggenheim.
While there will certainly be other successful electric car companies, there will not be another EV stock with astonishing returns as Tesla. Here’s why.
Tesla is the cause of the disturbance
Tesla has gone from a market capitalization of about $50 billion north of $1 trillion in just about two years because it has successfully disrupted a huge industry. The company is now nearly 20 years old and has been going public since 2010, but it didn’t reach a tipping point until 2020 as profitability was assured and the market was convinced that electric vehicles were the future of the auto industry.
Tesla stock was able to gain 2000% in a short period of time because the market gave long odds for its success. In fact, in 2018 and 2019, many of the headlines at Tesla focused on its liquidity burn rate and its chances of bankruptcy. Today, it’s a much different story, and the unwillingness to succeed, at least in the eyes of the market, is as big a reason for the stock monster’s return as the success of the business itself. Although hype played a role in the stock’s jump, the valuation is well supported at this point in fundamentals as the stock is trading at a P/E multiple of 60 with an expected revenue growth of 60% this year.
But now that Tesla has disrupted the auto industry, it can’t be disrupted again, or at least not in the same way. Competitors like Rivian, Lucid, and other Tesla fanatics don’t have anything to snag electric cars because they’re already transitioning into the mainstream. All they have to do is follow the path that Tesla has paved and enjoy the high-altitude electric vehicle ratings that Tesla’s success has created for the industry. While there is room for improvement in any product, the magical moment for proof of concept has already occurred in electric vehicles, thanks to Tesla, and it cannot be replicated.
There’s a reason many of the 21st century’s most successful stocks are disruptive agents. These are stocks like Amazon In e-commerce and cloud computing, Netflix In video entertainment, and apple In the phone. It is very difficult to disrupt a well-established industry, and the market is generally skeptical about the factors that could lead to disruption until they have established themselves. Like Tesla, Amazon and Netflix have been unprofitable for much of their history, raising the odds of the market against them, helping them generate huge returns in the long run.
Going from a startup successfully disrupting a huge industry usually leads to great returns, but the market is also skeptical about disruptors because most of them fail.
As stocks, one of the most important differences between Tesla and its electric vehicle competitors is its rating. Tesla’s success has distorted the electric car stock market, and there’s a huge gap between competitors like Rivian and Lucid, compared to when Tesla had a similar market capitalization.
For example, Tesla ended 2018 with a market capitalization of $57 billion. It had $21 billion in revenue and delivered 245,000 cars that year. Although it lost money during the year, it generated $414 million in operating profit in the fourth quarter.
By comparison, Rivian’s market capitalization briefly exceeded $150 billion shortly after its initial public offering (IPO) last November, even though it had only begun selling cars two months earlier. Likewise, Nicholas had a market capitalization of $30 billion at one point without selling a car, and Lucid flirted with a $100 billion market capitalization late last year, even though it only started selling cars last fall.
In other words, these stocks were priced to perfection in what now appear to be clear signs of market glut. Take a look at how these stocks have performed in the past few months.
While Tesla has fallen over the past six months, tracking with other growth stocks, the rest of the electric car segment has collapsed and could continue to fall further. Unlike Tesla a few years ago, these EV companies face stiff competition in electric vehicles, including against traditional automakers, and many startups are unproven, as they only recently brought their products to market. By contrast, Tesla has been selling electric cars since 2008.
With the level of competition in electric cars now, it’s unrealistic to expect another trillion-dollar EV company, and it won’t be easy for Tesla to maintain its valuation either.
How do you find your next Tesla?
Tesla’s next car will not be in EVs. It wouldn’t be in an industry that’s already disrupted. Instead, it would be a company that went public for a small market capitalization and would challenge established companies in an industry with a large addressable market.
Most investors will be skeptical about its success, and will likely lose money, despite the impressive growth rate. In other words, it will have a number of Tesla distinguishing features, but it operates in a different industry and sells a different product.
Finding your next Tesla isn’t going to be easy, but if you’re looking in the electric car segment, you’re looking in the wrong place.