Electric vehicle (EV) stocks have unwound some of their huge gains but remain favourites of momentum investors who have been driving almost anything EV-related higher.
This on the belief EVs are the way of the future and the majority of them will succeed in the long run.
That’s not how it works with innovative or disruptive new sectors, according to Rob Arnott, founder & Chairman of Research Affiliates.
Here is a brief excerpt from his recent article Big Market Delusion: Electric Vehicles, followed by a link to the full, free article, which delves into why not all EVs will be winners long-term.
by Rob Arnott
The “big market delusion” is when all firms in an evolving industry rise together, although as competitors ultimately some will win and some will lose.
The electric vehicle industry, with its astronomical growth in market-cap over the 12 months ending January 31, 2021, is a prime example of a big market delusion.
In the highly competitive and capital-intensive auto industry, the January 2021 valuations of electric vehicle manufacturers are simply not sustainable over the long term.
EV Industry: A Lesson in the Making?
Like airlines, the auto industry has historically been a competitive, capital-intensive business.
For this reason, despite the global demand for their products, the traditional major auto manufacturers have tended on average to trade at book-to-market ratios near or below 1.0.
We have little reason to believe that a change in the propulsion system from internal combustion engines to electric motors should have a pronounced impact on market competition or on the total industry valuation of the companies.
We examine the recent growth in market value for the global auto industry, focusing on the largest public auto companies by market capitalization.
Over the three-year period ending January 31, 2021, the global auto industry gained 70% in market value, growing to $2.16 trillion.
Interestingly, auto industry total value declined for the first two years, 2018 and 2019, of the three-year period.
Traditional automakers absorbed almost all of the decline in value, while the market value of electric vehicle (EV) specialists remained flat.
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