Executive Summary:
- Market participants have bemoaned stocks as levitating in a “bubble” for three years, though we’re now seeing evidence of an equity mania in selected areas
- Alarming parallels to the 1998-2000 timeframe, especially in the electric vehicle space, which is approaching a mania
- Recent SPAC issuances are symptomatic
- Over-issuance of new equity will likely cause the market to collapse under its own weight (a la 2000) and we’re on watch for performance of the most recent equity issuances as canaries in the coalmine
A very popular subject these days is the “bubble” in US equities. The world we inhabit on social media is filled with anguished wails from skeptics who hate the Fed’s easy money policies for destroying price discovery and distorting markets. We used to – emphasis on used to – downplay that chatter. But, we are now seeing many alarming parallels to the 1998-2000 timeframe, especially in the electric vehicle space, which is approaching a mania wholly unsupported by fundamentals.
We have written before about the differences between today and the ’99-’01 bubble. Then, the IPO frenzy was in full force. In 1999, 550 IPO’s were priced and the average first day gain was 70%. Bankers in 1999 would look at a hot IPO and then quickly file to bring public a close copycat. It was a supply and demand imbalance. Then, there were 12,000 mutual funds and only 6,000 public stocks. Do the math. Part of the unwind in 2001 began with high yield closing under the weight of oversupply, which then filtered into the equity markets. Back then, when the capital dried up, business plans collapsed. Here are three charts that show the number of US public companies outstanding, global IPO share issuance since 1999, and the number of ETF’s in the US today. The number of public companies correlates to total shares outstanding. Now do the math. Is it any wonder markets get frothy? But there’s frothy, and then there’s the EV space, which will get to in a moment.
Today, the frenzied IPO market of yore is being replaced by the SPAC (Special Purpose Acquisition Company). The SPAC used to be among the more arcane and sketchiest part of the public equity markets but now with the success of Nikola Motors (NKLA) among others, SPAC’s have taken on a new gloss. Why companies reverse merge into a public SPAC instead of going the normal IPO route is something we still don’t fully comprehend, so you are not alone if you are scratching your head about it.
But the story today is less about SPAC’s – they are merely a symptom – and more about the re-emergence of bubbles.
The electric vehicle space has gone crazy. Never in the history of markets has such a “disruptive” technology disrupted so little. Adoption rates of EV’s remain pathetically small in spite of what you read, and the only reason these pathetically small adoption rates are where they are is because of massive government support via subsidies available to EV buyers in almost every country across the globe. Tesla has received much praise for “turning the corner” on profitability, but the only reason why it has been profitable is because it sells its accumulated surplus of carbon credits to other automakers in danger of tripping state mandated fleet CO2 emissions levels. Yes, the scheme the gov’t has in place, forcing us to buy cars we don’t want, is solely responsible for Tesla’s profit. Absent credit sales, Tesla’s business – a pure-play EV company if there ever was one – is massively unprofitable.
And here is how this bubble looks like 1999. Tesla has returned 600% to investors over the past year in spite of a dramatic drop off in demand from many of its key markets. NIO, a Chinese EV-company that has been flirting with bankruptcy for what seems like years, is up more than 320% in the past year. Workhorse (WKHS), an electric delivery van and drone manufacturer with almost no revenues, is up 800% since March of this year. Arcimoto, a $200mm market cap manufacturer of two-seat and three-wheeled EV’s with $1.0 million in reported revenue last year, is up 120% in the last year.
No one has sprinkled fairy dust on this space. It’s crowded with competition and getting more crowded by the day. The underlying businesses can often only survive with government assistance. No one has truly been able to prove this is a sustainable business model with better economics than traditional auto manufacturers (which are bad on their own), so what gives?
A retail frenzy just like 1999. Tesla’s shareholder base is notoriously sketchy. Arcimoto’s shareholder list is what you would expect to find in a dodgy micro-cap. Workhorse’s is a collection of Who? and not Who’s-Who. I know you’ve read article after article about how much asset flows are now dominated passive investment vehicles and no doubt the shift to passive investing is having an impact on price discovery. But, the average Joe day trader still exists. We recently did a Twitter thread on how much retail can still influence markets, and the retail orgy is in full swing. It seems silly to contemplate, but with COVID keeping people home and no sports or online gambling to occupy attention, that urge has been reflected in a massive increase in retail trading. Robinhood, the retail trading app that sells your data to flash traders, doubled its trading volume in 2Q 2020 over 1Q 2020 to $180 billion. It’s not just the U.S., though, it’s a global phenomenon, which ups the ante should the party end. No one knows how much or how deep is the retail trading from Asia in our markets, but it is significant. Right now, retail has focused its attention on EV’s.
There is zero fundamental support for EV valuations up here. We would remind everyone that FSLR’s revenue doubled between 2009 and 2015 and its stock did this.
Why? Because future revenue growth was the fear. As it should be with EV’s today. There are no fewer than 20 new EV models expected over the next two years just for the EU market, which is friendly to EV’s. Double that for China. This market will cannibalize itself. Those selling electric vehicles into the EU will sell at a loss because the regulatory credits earned by having more EV’s on the road outweigh the penalties for not producing. And we all know what happens when companies are incentivized to produce no matter the profit potential. Bored, locked down retail investors are playing a giant game of musical chairs right now, especially in the EV space. Just like it did between 1999-2001 with internet stocks.