Are we in a bubble? Or are we at the start of a revolution in the auto business? I start this week with a table and two charts. They show that Rivian (lost $580m last quarter) and Lucid (lost $520m last quarter) are worth more than GM ($102bn revenue - forward-looking 12 months and Ford ($140 bn revenue - forward-looking 12 months). Tesla ($52 bn in forward-looking 12-month revenue) is valued at over $1 trillion. As a multiple of revenue, Tesla gets 20 x; Ford only 0.6 x and GM 0.9x.
On the face of it, this makes no sense. However, when growth is factored in, Ford and GM are both declining and Tesla is growing annually at 30%. Lucid and Rivian have infinite growth because they are starting with zero revenue. Lucis has 17,000 pre-orders of a fabulous car with an average price of around $140,000, so about $2.4 bn of revenue and great profit margins. Rivian has pre-orders from Amazon for
about 50,000 vehicles with an average price of $75,000, so about $3.75 bn. If we use those numbers as a basis then Rivian’s $124 bn market cap is 33 x its sales expectation based on current pre-orders and Lucid’s $72 bn market cap is 30 x its pre-order value.
Rivian and Lucid will have far higher annual growth than Tesla and so the higher multiple is justified.
So, no, this is not a bubble. It is how the stock market tries to distinguish between the past and the future. The future, because of growth, is always priced higher than the present, or the past.
And this is why venture capital is always focused on future growth potential, not current performance. That fact often gets lost in all the talk about “traction”. Traction is simply a snapshot of current performance. For it to have value it is necessary to believe that growth will continue for the foreseeable future and result in a significant market share of a large opportunity set.
Apple is going to play in the auto market, with what seems to be a fully autonomous vehicle. Rumors say 2025 is the year it will debut. About
70 million cars are sold new each year. That number has been flat to down over recent years. But the share taken by EVs is up and accelerating. Investors assume that by 2030 or so the vast majority of new cars sold will be EVs and that many will come from new manufacturers. If they are right then 70 million x $40,000 average price is a $2.8 trillion annual revenue opportunity by 2030. Buying the winners in that market today is entirely rational. Of course, if they are not winners the opposite is true. And the gross margins on those vehicles will be far better than Ford or GM’s current crop.
Tiger Global’s new $8.8 bn fund or Insight Partners $20 bn are, along with the others, racing to own this future potential today. The companies they invest in are discovered by seed fund managers, sometimes called Micro-VC, and angel investors. These funds can produce enormous returns for their investors if they can pick the future winners early. The entire value chain of angels -> seed funds -> venture funds and -> growth funds exists prior to a Lucid or a Rivian becoming a public company.
It’s an exciting time to be in Silicon Valley as the pace of change accelerates and the size of the reward does too.
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