Why EV Stocks Are (Mostly) Doomed [Transcript]
A frank conversation to level set your expectations.
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For some reason, people get emotional about electric vehicle (EV) stocks. Maybe it is the cult-ification of the Elon universe, I’m not sure. If you are someone who is angered by seeing this email header, this podcast is for you.
Travis Hoium from Asymmetric Investing joined the show this week to explain why he is skeptical about electric vehicle stocks. If you are bullish Tesla, Rivian, or any other EV player, this is an important listen for you. Hear the other side.
You probably won’t listen though.
Here are some transcript snippets from our discussion. Listen to the full episode on YouTube, Spotify, or Apple Podcasts.
What makes a good versus bad automotive company?
Travis:
Yeah, extremely difficult industry. And if you look back throughout history, you know, you had the Henry Ford days where you kind of get to mass market, you can have a Model T as long as it's black. And over the next 30 or 40 years, there were dozens, maybe even hundreds of auto companies started. But at the end of the day, most of them either went bankrupt or merged with each other. And you really ended up with I think it was three in the US and those have kind of changed hands and the brands have moved all around.
But basically, the same companies still exist today. And the only real newcomer that has had any modicum of success was Tesla. And that's why I think people got so excited about this industry. But overall, the returns, if you wanted to look at the return on invested capital, over time are extremely low in the auto industry because you're investing so much in building out manufacturing capacity.
You have relatively little operating leverage because you have relatively low margins. It's a very competitive market. So what differentiates a great company from a bad company? It's the little things like do you have an attractive line of vehicles? Are you in a market that's becoming more competitive or less competitive? This is one of the reasons that I like GM. They are really big into trucks and SUVs. As all this money pours into electric vehicles, guess what's getting forgotten?
Internal combustion engine trucks and SUVs. So that's where all the money is being made. I've compared this to buying cigarette stocks in the late 90s or early 2000s. Everybody just left that entire industry for dead and all investment went elsewhere. Well, it turns out, you know, I live in the Midwest. People are still buying a lot of trucks and SUVs. And so the transition, I think, if your thesis is that it's going to take longer than expected and those returns for those new companies are going to go down, then the returns are going to go up for some of the legacy companies.
So there's a lot of nuance in, know, is GM making better vehicles today than Ford? I think that's probably true. you know, same thing with something like Stellantis, which is having some operational issues. but you can, free cash flow is really the biggest thing that I watch from this industry, because if you're not generating cash from all the money that you're investing in the industry, then what are you going to do in the future? And you want to be able to turn inventory and all that kind of stuff.
So, so lots of nuance. I know I didn't give a detailed number example, but there's just a lot going on in the industry right now. And what I'm looking forward to in a lot of these companies is optionality. What do they have beyond just making cars and doing the same thing that they were doing 10 years ago? Is there something that potentially has 10 X or a hundred, a hundred X opportunity?
You wrote an article that I think was, it was thought-provoking. I think it was supposed to bring in a lot of the bullish people on electric vehicles. And I think the title was “Why EV Companies Are Uninvestable Today”. Why is that? Why do you believe that?
Travis:
Most of the electric vehicle companies today are facing an environment where they have falling margins. So Tesla would be an example of that. They're going to have to invest more and more money in new capacity. So Rivian is a great example of that. They're building out not only their Normal Illinois facility, but they're also building out this Georgia facility. And what are the returns on that? Well, you're going to increase supply into a market that is already arguably oversupplied.
So you're betting on an industry, industry adoption of electric vehicles increasing, I think at a faster rate than it is actually increasing. And then you get into these laws of supply and demand, right? Like this is fundamentally what makes the auto industry so difficult to invest in. It's so difficult for these managers to run is if you build a manufacturing facility that has the ability to make a million cars a year, you have a lot of operating expenses, not only capital expenses, but you have operating expenses that go into running that facility.
If you only have demand for 500,000 vehicles, you're kind of screwed and there's no easy answer. There's no what do you do? You cut your prices to try to get to 600,000 units of demand, but now your margins are lower. The economics of manufacturing are just fundamentally different than the economics of technology. And, you know, a lot of investors that are probably listening to this today have cut their teeth with companies that are technology companies. So you have a ton of operating leverage in the business. If you increase your revenue by a dollar, your profit increases by a dollar. Google falls into this category, Meta falls into this category. In most tech companies, you're spending a ton of money upfront, but the upside is your potential is unlimited and you're not limited by capacity typically. So your revenue upside is limited. So you're operating leverage is extremely high. It's basically one to one.
In the auto industry, if you have a 15 % gross margin, you increase your revenue by a dollar, your gross profit goes up by 15 cents. So your cost structure better be in line with what you're producing and what you're able to charge for those vehicles. And I think that's, we'll get into this, but that's, think fundamentally the mismatch that Rivian has with the market is they have the wrong business model and the wrong cost structure for the opportunity that they have.
How does the flood of supply from China, EV makers and US tariffs connect to all this?
Travis:
It's a problem in China right now. And we're seeing this across the board with everybody. GM has basically said kind of like, we don't really know what to do with our China business right now. you know, Tesla it's, it's part of their margin hit. part of their Tesla, Tesla's idea was to export those vehicles, particularly to Europe. So it seems like Europe is being a little bit more hostile to any sort of imports from China.
The US is taking the same stance. This is not really surprising because it's such a big industry It's such a big ticket item and it's so many jobs that are involved so It's a problem that's going to continue and if you know industrial developments of the last 10 or 15 years or any indication I Don't see China backing off on just increasing supply again and again and again and I don't know are a hundred percent tariffs going to be enough to make them not attractive in the US probably but it will put pressure on every one of these automakers that are trying to export vehicles from the US or even from China everywhere else around the world so it's a challenge from a global perspective the US may be insulated maybe Europe or parts of Europe are going to be insulated but it's you know but then as a result we're gonna pay the price because our vehicles are going to be 60 ,000 when you could buy an amazing Chinese EV for 20,000.
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