The Absurdity of EV Valuations

A few days ago, I saw a Rivian truck for the first time in person. I had started hearing about the company for almost a whole two years before my first encounter with the Mars Rover lookalike.

Rivian R1T

I don’t intend on driving an EV until I have no other choice. I love the feeling of driving a regular, gasoline-powered car. If that’s inconsiderate to the environment, then the environment will have to deal with it — it’s one of the luxuries in life I refuse to give up.

However, as an investor, I don’t have the luxury of ignoring the explosion of EV valuations. Both Rivian and Lucid Motors IPOd in 2021 at a combined value of 150B, despite neither company generating revenue at the time. Even after the recent market downturn, all of these EV companies still boast incredibly lofty valuations. It’s an exciting new space, and the thought of cashing in on a technological revolution is appealing to all of us.

However, this might be something to stay away from.

There have been many critics of the high soaring valuations of these new companies that follow Tesla’s trailblaze. The thought of being the next Tesla has dozens of EV producers popping up. Investors have been cheering them on, kind of like a parent cheering on their unathletic kid as they step up to the plate.

I think you can already tell my opinion on these companies: I’d bet that the vast majority of them will strike out and vanish within the next ten years.

Take an example from over a century ago

In the late 19th century, there was complete investor enthrallment in railroads. They would revolutionize transportation as we know it. From 1880–1889, over 71,000 miles of railway were built in the US, doubling the worldwide total in under 10 years.

Five years later, a quarter of those railway companies had filed for bankruptcy, and even more of them were in poor condition.

The American railroad bubble had popped, but it took a long time for the market to adjust to the actuality of the transportation revolution.

Funnily enough, the same thing had happened 50 years prior, but this time it was across the pond, in what has been dubbed “Railway Mania.” The first successful railway in England was the Liverpool-Manchester line, and its roaring success and profitability inspired a surge of investments in dozens of railway companies. An emerging middle class allowed for huge sums of non-institutional money to be pumped into the system as these investors hoped to cash in on the next big railway. A bubble emerged, only to pop over a decade later in 1846.

The railway companies didn’t live up to what investors wanted them to be: an overnight revolution. The number of operating railway companies dropped to near zero, and though the investment thesis proved to be true long-term, it would take more than 40 years for a select few railway companies to gain solid footing and profitability.

I really hope this is starting to sound familiar because here’s what’s happened in the EV space over the past 10 years:

In the 2010s, Electric Vehicle pioneer Tesla was the first of its kind to successfully establish itself in the market, showing profitability and production capacity alongside its awe-inspiring technology. Its share price surged from $17/share at IPO to over $900/share in 2020. In the late 2010s, many other EV manufacturers came to light, and despite not showing the same results as Tesla, managed to IPO at insane valuations thanks to middle-class interest: people who hoped to cash in on the next Tesla.

I wonder where the story goes from here?

I don’t doubt that EVs will prove to be the future, but you’re kidding yourself if you think that Rivian, Neo, Lucid, and other emerging companies are going to take the cake, and you’re even more delusional if you think that’s going to happen in the next 5 years. It’s much more likely that established car manufacturers are the ones that will take most of the EV market share, and even that won’t happen any time soon.

Public excitement about these kinds of technological advancements far outpaces the integration of them into society. Railways in England didn’t regain their relevancy and justify the excitement about them until decades after the bubble popped. Our imaginations about these developments cause us to be entirely unrealistic when it comes to the implementation of new technologies.

We like to think that next year, our society will be far more advanced than it is this year. That tomorrow, we will have something we don’t today.

The reality is that change at such a scale take much longer. It doesn’t spring up overnight, or even in a year — or five. It will take decades for EVs to start to justify their lofty valuations, and even longer before they really dominate the market.

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Justin DeLoach

Justin DeLoach

Student at UNC Chapel Hill. I write (mostly) about the market. Email me @justin.deloach@live.com