EVs – The babies and the bathwater.

Reality and interest rates trigger a rout.

• While the current price correction is likely to mean the end of the road for many of the EV upstarts and the supply chain, there is a baby or two that is being thrown out with the bathwater.
• Ever since most of the world decided it would commit to being carbon-free by a certain date, the electrification of vehicles has been one of the hottest areas for investment.
• In response to the overwhelming demand, many companies that have no business being public have rushed to  market eager to raise large sums of money at outlandish valuations.
• This is an entirely rational response on the part of companies because the higher the valuation, the less of the company one has to give away and at the valuations we have seen in 2021, this made a lot of sense.
• The problem is that when a sector falls out of favour, its stocks will sink into obscurity making it very hard to attract any new investor interest even if things begin to go really well.
• Furthermore, investors who came in at the top will be very unhappy and restless which will make investor meetings and board meetings difficult which could even hold up the operations of the company.
• The worst-case scenario is when one of these companies needs to raise more money.
• This is certainly the case for Lucid Motors, Faraday Future and The Metals Company who are all companies who in their SPAC business plans stated that billions more would be needed to be raised in order to reach net cash flow breakeven.
• This is all well and good when the share price has doubled or more from the SPAC listing price of $10, but most of these types of companies are now far underwater.
• Faraday Future and The Metals Company (battery metals producer) are now down 62% and 88% from the $10 SPAC price meaning that raising more money will be extremely dilutive to the existing shareholders.
• This will make it very difficult to raise more money.
• Hence, I think that both of these companies are going to struggle to survive in this environment and I am not convinced that either of them is a viable going concern.
• Lucid Motors is an exception because it actually has something that is valuable.
• Its current price is $27.15 (up 171%) but 51% off its peak, and in my opinion, still looks expensive.
• Lucid has proprietary technology that it supplies to the Formula E racing circuit which has also allowed it to make the electric motors in its vehicles smaller and more efficient than anyone else.
• This is a big reason the Lucid Motors Air has raised a lot of eyebrows and impressed reviewers with its range, performance and luxury despite its eye-watering price tag.
• However, the laundry list of train wrecks is almost endless and even the much-touted, Rivian is now 68% off its highs and still does not look cheap to me.
• Furthermore, the Chinese market has around 400 EV makers which is 15x more companies than there are who serve global vehicle demand today, let alone just China.
• Hence, there will be massive consolidation in the Chinese market and, I suspect, also overseas.
• However, lying among the wreckage are companies with good products which are likely to survive in the long term and who will represent a great bargain at the bottom of the market.
• One of these is a company called Ouster which is addressing the cost of making Lidars by using traditional silicon manufacturing techniques.
• The story here is not so much about cars but all of the other vehicles and robots that will need to perceive their environments going forward.
• The company has an incredible 600 customers whose pipeline supports the revenue forecast out to 2024.
• Furthermore, its first few sets of results have demonstrated that the company has good visibility meaning that there should not be any sudden surprises.
• The shares are down 70% from the $10 de-SPAC price giving a market capitalisation of $469m and an enterprise value of $249m as the company still has $221m in cash from the transaction.
• In December 2020, the company gave a revenue forecast of $34m for 2021 and $107 for 2022.
• For the last 12 months, the company has hit its targets almost exactly, increasing my confidence in the 2022 forecast of $107m.
• This puts the company on 2.3x 2022 EV/Sales which is starting to look cheap.
• I have no idea when sentiment will turn on this company and concede that it could still go lower with the rest of the sector as the prospect of interest rate rises pummels the riskier end of the stock market.
• However, this one looks like a baby that has been thrown out with the bathwater.
• Ouster is a company I am considering taking a position in and there are certain to be a few more.