Wall Street focuses on automotive startups as electrics gain traction
September 7, 2020
Legacy automakers have been in a slump during recent years, while newer startups continue to climb.
Electric vehicles seem to be on the forefront of investors’ minds, even with few on the market.
Stocks may change when some of these companies actually release vehicles.
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Like legendary comedian Rodney Dangerfield, traditional automakers such as General Motors and Ford “don’t get no respect.” Not from Wall Street, anyway.
Take GM, which has seen its stock price slide by as much as two-thirds from the $45.88 high it hit as recently as October 2017. The same story can be repeated over and over again with manufacturers like Ford, Volkswagen, BMW, Toyota, and Nissan.
On the other hand are the new players, such as Tesla, which has seen a 500% surge in its own stock price since mid-March, while startups like Nikola Motors are being rewarded with market cap numbers in some cases approaching those of legacy automakers — even though they’ve yet to build a single vehicle.
The gap has led some analysts to suggest breaking up established automakers like GM to “unlock” the potential value of their own EV programs. If there ever was any real affection for the auto industry, investors have fallen out of love with legacy manufacturers, said Joe Phillippi, a long-time Wall Street analyst who now runs AutoTrends Consulting.
“More and more investors believe electric vehicles are the future and that internal combustion engines are going to be dinosaurs. What Wall Street wants is growth,” he said.
Officials with legacy automakers have grown increasingly frustrated by the stock market’s fixation on electric vehicles, especially considering the hefty investments they are making on their own in zero-emissions technology. Ford, for one, is putting close to $12 billion into electrified vehicles through 2022. GM’s commitment is closer to $20 billion through 2025.
CEO Mary Barra has said that the automaker is “on a path to an all-electric future,” with “20 or more” battery-electric vehicles due by 2023. EVs are set to make up 40% of the new models GM will launch in China over the next few years.
While such announcements, along with better-than-expected earnings, have helped GM stock rebound from the 52-week low of just $16.80 set on March 18, the company still languishes far from its past glory. Its current market capitalization of $42.93 billion compares with the $390 billion valuation for Tesla.
Not everyone on Wall Street is ignoring GM. A new analysis by Morgan Stanley estimates the electric side of GM’s business could be worth $20 billion were it to be spun off, while Deutsche Bank is putting the figure at as much as $100 billion, or nearly 2.5 times the company’s current market capitalization.
Such a move “could unlock a massive amount of value,” Deutsche Bank analyst Emmanuel Rosner said during an appearance on CNBC this week. Meanwhile, Morgan Stanley auto analyst Adam Jonas wrote in a research report on Tuesday that, “The autonomy between the two units can liberate each other of various impediments to efficient capital allocation and talent development.”
Could a spin-off be part of CEO Barra’s plan? Asked during an earnings call with analysts about the possibility of changing the company’s name to reflect its newfound focus on EVs, Barra said “nothing is off the table,” adding, “We are evaluating and always evaluate many different scenarios, so I don’t have anything further to say other than, we are open to looking at and evaluate anything that we think is going to drive long-term shareholder value.”
The automaker has several ways it might use its increasing emphasis on technology to drive value. In November 2018, when it was announced that former GM President Dan Ammann would become CEO of San Francisco-based Cruise, the New Zealand-born executive said in an interview that the autonomous vehicle subsidiary could become more valuable than GM’s auto operations at some point. He suggested the automaker might consider a spin-off or simply rename itself Cruise to reflect its increasing high-tech focus.
But not everyone buys into the idea of breaking up GM. For one thing, said analyst Phillippi, that would ensure that the “old” GM would be guaranteed to become “obsolete” as sales of conventional, gas- and diesel-powered vehicles shrink over the coming years. And, even if that side of the company could survive in the near- to mid-term, it would need to electrify its lineup to meet increasingly stringent US and foreign emissions and fuel economy mandates.
Of course, GM – and Ford and VW and Toyota and all the other legacy brands – could simply move to phase out their conventional product lines. But despite the interest investors might have in EVs, they’re way out in front of what car buyers are actually demanding.
If anything, the electric vehicle market actually has shrunk this year, falling harder than the overall new car market. Sales are expected to settle back to around 200,000 for all of 2020, Kevin Riddell, senior manager of LMC Automotive, forecast during a meeting of the Automotive Press Association this week, compared with 250,000 last year. That would be barely 1.5% of U.S. new vehicle sales. Even Tesla is down, despite the launch of the new Model Y.
While LMC forecasts EV sales should begin to rebound in 2021, a flood of new models will compete for a still modest-sized market and, warned Reid Bigland, former sales chief at Fiat Chrysler, sales on a per-vehicle basis will likely be so small – with the exception of Tesla – that it is anyone’s guess when battery-cars will start generating profits.
Such concerns don’t seem to be worrying investors much. While legacy manufacturers struggle to prop up their stock prices, Wall Street is embracing more and more of the EV startups. Phoenix-based Nikola, which went public earlier this year, now has a market cap of around $16 billion, or roughly two-thirds of Ford’s. Yet the company is still more than a year away from launching the first of its hydrogen and battery-powered trucks and pickups.
Nikola used a creative approach to get listed, partnering with VectoIQ Acquisition Corp., a special purpose acquisition company, or SPAC. Similar “blank check companies” will help take EV startups Fisker Inc. and Canoo public later this year, as well. Fisker has estimated it could come out with a market cap of around $2.5 billion.
Such unbridled optimism could continue for some time, said Michelle Krebs, an analyst with Cox Automotive, as long as Wall Street views EV manufacturers as part of the high-tech world. Reality, she suggested, could set in as the market becomes more crowded and the realization that they are simply selling cars – however they are powered – sets in.
That’s certainly what legacy manufacturers are hoping for.
Despite his frustration at the company’s poor performance on Wall Street – where its stock hasn’t topped $10 since July 2019 – new Ford CEO Jim Farley told Business Insider earlier this month that he’s optimistic investors will finally figure things out.
Ford doesn’t intend to lag when it comes to new battery cars, nor in other high-tech areas, such as connected and autonomous vehicles, Farley insisted, adding that the automaker’s “great relationship” with its existing customers will prop it up even as the market transitions. “So, I’m feeling fantastic about our ability to compete with new competitors.”
Of course, he’s not the first to say that. In fact, that’s much the same position that was taken by former CEO Alan Mullaly and his successors Mark Fields and Jim Hackett. For now, at least, Wall Street remains unimpressed.