A Year Later, Investing in Tesla, and Rivian

I wrote a post at the beginning of 2022 about investing in two of the most popular all electric vehicle manufacturers, Tesla and Rivian. Investing in Tesla, and Rivian – Missives to the Abyss (latterdaydad.com) In my post from a year ago regarding investing in Tesla I wrote the following:

“Unlike many of the dot.com companies that went bankrupt after that bubble burst [in early 2000 to late 2002], Tesla…..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.”

If we review the market caps and share prices of the legacy car manufacturers and Tesla, with Rivian as a throw in, we can see that none of the companies did well but Tesla did particularly poorly and Rivian did the worse. The five legacy car manufacturers (Toyota, VW, GM, Honda, and Ford) saw their share prices drop from 21% to 52% for an average of 38% while Tesla dropped 68% and Rivian 80%.

 1/1/2022 Market Cap (In Billions)Share Price 1/3/20221/1/2023 Market Cap (In Billions)Share Price 1/1/2023Percentage Change In Market Cap 2022-2023Percentage Change In Share Price 2022-2023

Tesla and Rivian had the greatest losses, this despite one of the biggest drags on the economy and the stock markets in 2022 being the rise in gas prices and inflation brought about by Russia’s invasion of Ukraine. The rise in gasoline prices should have favored the exclusive electric car companies, but it didn’t. Another factor in favor of Tesla and Rivian is that those two companies saw the greatest increases percentage wise in number of cars delivered in 2021. All five legacy car makers saw decreases in car deliveries from 2020 to 2021 while Tesla doubled the number of car and Rivian began deliveries.

Here was the chart I posted last year comparing the typical investment parameters of Tesla and Rivian against some of the established car manufactures.

 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)

Here is the same chart (minus the market cap rank) updated this year.

 Cars sold Worldwide (2021)Rank1/1/2023 Market Cap (In Billions)Price to Earnings (TTM)Price to Earning (Projected)Price to Revenues (TTM)Price to Cars  sold in 2021 (In thousands)

What we can see in comparing the two charts is that although each of the car companies have fallen in most investment parameters, Tesla’s fall has been much more steep. Tesla is more and more reverting to parameters more in line with the legacy car companies.

Like last year’s post, the last column, price to cars sold in 2021 in thousands was my own calculation. I simply divided the market capitalization of each company by the number of cars each sold in 2021. So how much of a fractional interest of each company would I need to own to be equivalent to one car produced? For Honda, I would need to a fractional interest worth $8,680.00, for Ford $11,860.00. For Tesla I would need to own a fractional interest worth $415,590.00, about twenty to forty times more than the other established car manufacturers. Now that Rivian has actually sold cars, we can do this calculation. With Rivian you would need a fractional interest in Rivian of $17,695,650.00 to equal one car sold.

The adjustment in the share price for Tesla and Rivian, and their relatively steeper declines, of course makes them more attractive this year than last year. But I believe that both companies are still set for further downward pressures in their share prices. Tesla, with all the distractions that Elon Musk’s purchase of Twitter has caused and the damage done to Tesla’s image with influential investors, is not going to receive all the free laudatory advertising it did in the past. Tesla returning to the sky high valuations it had just a year ago will be near impossible, in my opinion.

I ended last year’s post with the following:

“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.”

I think for Tesla much of the “bubble” pressure has already dissipated. Tesla is delivering more vehicles and with it greater revenues and earnings. The question is whether those increases in revenues and earnings justify the lofty evaluations investors still give Tesla? Tesla has a number of serious headwinds working against the company. Tesla produces and sells about half their cars in China. China under the Chinese Communist Party has been notorious for attracting and welcoming foreign investment but at the same time putting roadblocks in place to prevent capital from leaving China. At the same time, as the saga of Jack Ma attests, entrepreneurs in China, whether native Chinese or foreign, can do extremely well while in the Communist Party’s good graces but not so well when the entrepreneur falls out of favor. Musk is going to do all the kissing up he can to stay in the Party’s favor, but at some point either the Party is going to expect a greater show of loyalty or the bad press in the United States from his dealings with the Party is going to take its toll. Musk had the press in the palm of his hand while he was the crusader against climate change with his electric vehicles. Musk is going to pay a price now that he allowed former President Trump back on Twitter and has courted the Right as a champion of free speech. Which begs the question, how is Musk a champion of fundamental human rights like free speech in the United States while Tesla makes half its car in the Communist dictatorship that is China, whose citizens have virtually no free speech rights?

Tesla is going to survive and even grow revenues and earnings, although Rivian may not grow enough to survive, but the days of a fawning press inflating Tesla’s share price and Musk masquerading as the unquestioned management wunderkind are over, and with it Tesla’s inflated valuations. With Tesla and Musk’s fall from grace the expectations of a quick adoption of electric vehicles worldwide will be tempered as well.

2023 is going to be an interesting year in the race for automotive supremacy, and survival.