Investing in Tesla, and Rivian

I used to invest in the stock market pretty actively. I began to study the market a few years prior to the bubble bursting in March of 2000. Investors in electric car companies, particularly Tesla and Rivian, remind me so much of the tech investors pontificating about internet stocks just prior to the collapse. I remember so clearly all those sermons on how the “old” rules of investing and valuing stocks just didn’t apply anymore. So I wanted to put my own prediction out there about the prospects of Tesla and Rivian for the next few years. Unlike many of the companies that went bankrupt after that bubble burst, Tesla (but not Rivian) is of course a real company that manufactures real products and has real revenues. That Tesla is a real company with good products of course doesn’t mean that it can’t be wildly overpriced.

A share is a fractional interest in a company. When you buy a share of a car company like Tesla or Rivian you’re buying a fractional interest in a company that designs, manufacturers, and sells cars for a profit, or plans to do so in the future. With your share you have a tiny fractional interest in everything the company owns; the company’s factories, patents, employment contracts, reputation, etc., etc. Most investors are investing with the expectation, or hope, that the share price will rise and/or the company will pay dividends. Typically, for the share price to rise long term the company has to demonstrate the ability to consistently manufacture and sell a product for a profit.

I made this little chart comparing the typical investment parameters of Tesla and Rivian against some of the established car manufactures, just to clarify my own thoughts.

 Cars sold Worldwide (2020)RankCurrent Market Cap (In Billions)RankPrice to Earnings (TTM)Price to Earning (Projected)Price to Revenues (TTM)Price to Cars  sold in 2020 (In thousands)

World wide cars sales in 2020 where somewhere around 66 million. Five of the six largest car manufacturers by cars sold, Toyota, Volkswagen, General Motors, Honda and Ford, sold a combined 34.7 million cars in 2020, a little over half the world wide total. Tesla sold a little under half a million cars in 2020, or less than 1% of the world wide total. The combined market capitalization of these 5 large established car companies is around $600 billion, a little under 60% of Tesla’s one trillion dollar plus market capitalization. What is the likelihood that Tesla alone will ever even approach being as dominant in the car industry as these five companies combined? Not likely at all. Rivian, having never sold a vehicle, is another matter completely.

The last column, price to cars sold in 2020 in thousands was my own calculation. I simply divided the market capitalization of each company by the number of cars each sold in 2020. So how much of a fractional interest of each company would I need to own to be equivalent to one car produced annually? For Honda, I would need to a fractional interest worth $10,080.00, for Ford $20,250.00. For Tesla I would need to own a fractional interest worth $2,044,080.00, about one hundred times more than the other established car manufacturers.

The argument for Tesla is that Tesla is a dedicated electric (EV) car manufacturer, while the others are not, and sales of electric car vehicles are growing exponentially while the sales of internal combustion engine (ICE) cars will inevitably decline. And of course, the argument goes, Tesla is going to dominate that market moving forward as the first to market. This assumes that these established car companies, with literally centuries of combined experience and expertise designing, manufacturing, and marketing cars, are not going to be able to find a way to successfully compete with Tesla in the EV market even though their professional lives depend on it. Doubtful. We’re already seeing the established manufacturers, with their legions of loyal buyers and dependent dealers, move into the EV market after witnessing Tesla’s success.

More has been said, can be said, and will be said by observers much more knowledgeable and experienced than me, but I would not invest in either of these companies at these valuations. Tesla and Rivian are, in my opinion, bubble stocks. Whether the share price of each goes up from here or down from here I don’t know, but long term the present valuations leave little to no prospects for growth for current shareholders. All just one man’s opinion.