Beware These 4 Overvalued Electric Vehicle Companies

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The electric vehicle industry has been one of the fastest growing industries over the past year, triggering a global automotive revolution. However, the industry’s surging momentum has been supported primarily by investor optimism regarding its potential, rather than its operational performance. Global vehicle sales slumped by one-fifth in 2020, with electric vehicles accounting for 43% of the total sales volume.

A slowly recovering economy has increased the pressure on this industry because companies are failing to generate sufficient revenues to justify their premium valuations. While governments have been shaping policies to drive the EV sector, i.e., with tax credits and other mandates, depressed consumer spending levels and stagnant job growth have affected industry sales.

As a result, most EV companies, including Tesla, Inc. (TSLA) and Xpeng, Inc. (XPEV), are struggling to generate adequate profits. Furthermore, with multiple start-up EV manufactures making their stock market debuts, the EV space appears to be in a bubble. The stocks of EV startups Fisker, Inc. (FSR) and Nikola Corporation (NKLA) have gained in double digits over the past year. But these companies have not launched a single vehicle in the market.

Tesla, Inc. (TSLA)

TSLA has been leading the EV revolution worldwide, with 424.1% gains over the past year. The company’s recent inclusion in the S&P 500 index after reporting profits in five consecutive quarters sent its stock soaring, pushing it to a nearly 95% over the past three months.

TSLA strengthened its position as the largest EV manufacturer in the world in 2020, with annual deliveries crossing the half-a-million mark. The company also began operations in its Shanghai manufacturing base as of Jan. 2.

TSLA’s total revenues have increased 46% year-over-year to $10.74 billion in the fourth quarter ended Dec. 31, 2020. Its Gross profit has risen 49% from the same period last year to $2.07 billion, while its non-GAAP net income grew 134% from the year-ago value to $903 million. Its non-GAAP EPS has increased 95% from the prior year quarter to $0.80.

While the company’s impressive earnings and revenue growth have driven the stock’s price performance, its low profitability is still a concern. Even after a 5-for-1 stock split last August, the stock is trading at sky-high valuations. In fact, TSLA’s CEO, Elon Musk, has expressed concern regarding the company’s low profitability in a leaked email released in December. While the stock has been surging lately due to expectations of higher profits in the future, TSLA's recent profitability has been very low.

In terms of non-GAAP forward p/e, TSLA has recently been trading at 192.02x, which is 866.2% more expensive than the industry average of 19.87x. The company’s forward price/sales ratio of 16.04x is 1063.1% higher than the industry average of 1.38x. TSLA is also more expensive compared to its peers in terms of forward price/cash Flow (142.29x vs 16.86x).

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