In the past, Tesla Inc. (NASDAQ:TSLA) CEO Elon Musk never hesitated to call it as it was whenever TSLA stock started overheating. But maybe he’s finally beginning to buy the Tesla hype. Lately, all he could muster was a “wow” after another Wall Street pundit joined the ranks of investors who cannot seem to get enough of the EV maker. Tesla and the EV sector have been running riot in recent weeks thanks to a wave of speculative bets and the famous Robinhood effect. Tesla and leading Chinese EV manufacturer, NIO Inc. (NYSE:NIO) have become Robinhood’s most coveted stocks, with the two commanding the highest number of new owners over the past 30 days on the zero-commission trading app.
Currently, 4 EV names appear on Robintrack’s top 25 leaderboard, with Nikola (NYSE:NKLA) and Workhorse (NASDAQ: WKHS) being the other two. Robintrack is a company that collects data on Robinhood users’ activity.
The huge runups by companies in the space – a majority with little to show in the way of real products or profits – could be a textbook case of irrational exuberance and the ESG craze gone too far.
Whereas there’s no denying that the EV sector appears to have a bright future (mostly), there’s growing evidence that the participation of hordes of retail and amateur traders in the stock markets with no clear understanding of the underlying risks could be fueling the swelling bubble.
Take the case of the sector leader, Tesla, whose shares have gained 252 percent in the year-to-date and confirmed its billing as a true cult stock.
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The huge runup means that the EV maker is now worth more than General Motors (NYSE: GM), Ford Motor Company (NYSE: F), Fiat Chrysler Automobiles US (NYSE: FCAU), BMW (OTCMKTS: BAMXF), Daimler (OTCMKTS: DDAIF), and Volkswagen (OTCMKTS:VLKAF) combined. Never mind the fact that the U.S. ‘Big 3’ of General Motors, Ford, and Fiat Chrysler sold 1.29 million vehicles last quarter compared to Tesla’s 90,650, or a ratio of 14.3:1.
Tesla’s current share price of $1,486 is quite hard to wrap your head around. According to Morgan Stanley, a $1,000 share price implies investors expect the company to sell ~4 million/year by the turn of the decade, or about 8x its current production clip of 500k/year. TSLA is now flirting with $1,500.
The lofty valuation and inflated expectations have not stopped Wall Street from joining the feeding frenzy, with the Street high of $2,332 by Piper Sandler representing nearly 60 percent upside to current price.
A case could be made for NIO, whose shares have nearly doubled over the past couple of weeks and are up 250 percent YTD after the company pulled back from the brink of bankruptcy. In April, the company was able to raise 7B yuan ($1B) from state investors followed by a sale of shares worth $428M in the secondary markets in June. However, NIO has never been profitable and plies its trade in a crowded neighborhood with more than 400 EV manufacturers.
Workhorse is the fifth most popular stock on Robinhood over the past 30 days. WKHS is up a staggering 336.5 percent in the past 30 days alone and 442.8 percent YTD.
Workhorse develops electric delivery vans targeting delivery companies like DHL, UPS, and FedEx. The company also manufactures delivery drones. Previously, the company focused its energies on building an electric pickup truck but was forced to change tack after the project proved too costly. Recently, the company scored an important victory after its C-Series all-electric delivery trucks received an executive order from the California Air Resources Board.
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However, Workhorse has no revenues to speak of and the company’s $1.5B valuation rests purely on speculation about its future potential.
The same goes for Nikola, whose shares have surged 423 percent YTD giving the company a valuation of $19.5B despite the company having zero products.
Robinhood favors Tesla
According to RobinTrack founder Casey Primozic, two Robinhood trading trends heavily favor Tesla and its EV brethren: trend following and “mean reversion.”
Primozic says that two years ago, Tesla was more of a mean reversion-traded stock whereby investors would buy as it fell and sold as it returned to a higher price. However, that changed last year when investors started to chase TSLA on the way up, using big jumps in price as a trigger to buy more shares aka trend following. The same trend appears to be playing out for its EV peers.
It’s exactly this kind of herd behavior that precipitated the Dotcom crash of two decades ago, only this time the bubble effect is even more potent since amateur investors are using TiKTok, Instagram, and Twitter to watch what their friends are buying.
But they better be warned: Fundamentals always eventually win, and the day of reckoning could be fast approaching.