The electric car revolution is in full swing. In 2018, more than two million electric vehicles were sold, according to Bloomberg, which forecasts annual sales will grow to 10 million by 2025, 28 million by 2030 and 56 million by 2040. So, what’s the outlook for Tesla [TSLA], Nio [NIO], and BYD [BYDDF] share prices as the green revolution revs up?
Estimated sales of electric vehicles by 2040
Tesla’s infamously volatile share price started the year around $310 before dropping as low as $178 in early June. This since accelerated back to $333 (as of close on 4 December) off the back of strong third-quarter results and the announcement of its new “gigafactory” in China. As a result, Tesla short-sellers have been left red-faced, looking at $709.6mn in mark-to-market losses this year, according to Bloomberg and S3 Partners.
Elsewhere in the sector Chinese electric car maker Nio [NIO] is travelling a bumpy road with rumours of a low-ball takeover surfacing following a troubled few months. Despite a 35% lift in car sales in the second quarter, it has faced issues including cost overruns, battery recalls and reduced government EV subsidies.
Share price shock for Tesla
Tesla has been a favourite ride for short-sellers in the last few months. At the end of October, the stock held about $8.3bn in short interest, according to Benzinga based on data from S3 Partners – more than 20% of its publicly traded shares. This short interest followed price cuts, worse than expected sales, larger than expected losses and rising competition from traditional car manufacturers such as Volkswagen [VOW].
In a further blow to short-sellers reports have emerged that Japan’s Government Pension Investment Fund has declared it will no longer allow shares to be loaned, affecting shares in its $370bn overseas equity portfolio, according to the Financial Times.
This prompted a swift response from Musk, who tweeted: “Bravo, right thing to do! Short-selling should be illegal.” He has previously described short-sellers as “jerks who want us to die” in an interview with Rolling Stone.
Musk may have been feeling extra bullish after analyst Alexander Potter of Piper Jaffray increased his price target on the stock to $423 – a more than 25% upside. According to Market Screener, the analyst consensus is hold with an average target price of just $300.23.
In particular, Potter described Tesla’s new Cybertruck as “awesome” and that, smashable windows aside, it could sell more than 200,000 in the US every year from 2023.
Potter called Tesla the most “impactful disrupter” in the transportation sector and the stock was a “must-own”. Tesla, according to Potter has a solid mission statement, loyal fans and bold designs as well as high-volume manufacturing, impressive operational-expense control and frugal capital spending.
However, other analysts remain cautious, highlighting competition from established players and Musk’s own erratic behaviour that they claim damages decision making and the firm’s reputation.
A rock and a hard place
Meanwhile, there are murmurings of a takeover at fellow manufacturer Nio. Aiden Wang, financial blogger writing in Seeking Alpha, suggests that the manufacturer’s financial situation indicates that privatisation is on its way.
Wang is not the only one. “I estimate that NIO probably entered Q4 2019 with only $300mn or so in cash, but it has been losing over $300mn a quarter in earnings, and probably more in cash flow,” Mark Hake writes in Investor Place.
“I estimate that NIO probably entered Q4 2019 with only $300mn or so in cash, but it has been losing over $300mn a quarter in earnings, and probably more in cash flow” - Investor Places Mark Hake
“As a result, it is likely one of NIO’s shareholders or major clients will make a low-ball bid for all of NIO. Or they could offer to finance the company with debt that would essentially dilute shareholders with associated warrants or convertible features.” Hake predicts that Tencent Holdings, which owns 13.3% of NIO stock, is the “natural buyer”.
However, he suggests that it is unlikely that the takeover will be priced at over $2 per share. “If you already own NIO, you essentially are stuck now. You are probably afraid to sell in case a deal is announced at a higher price,” The other alternative is that the company enters bankruptcy without financing, and the stock becomes worthless, hobbling shareholders somewhat.
What are the options for traders?
Traders should perhaps look instead at fellow Chinese electric car maker BYD Company Limited [BYDDY] which could provide a bullish breakout for traders. It has also had a tough year with its share price down 10.43% YTD (as of 5 December) resulting from slowing profits and revenue, and those cuts in subsidies.
|Return on Equity (TTM)||-10.45%||-611.88%||5.4%|
|Quarterly Revenue Growth (YoY)||-7.60%||3,180.10%||-9.20%|
Tesla, Nio & BYD share price vitals, Yahoo Finance, 05 December 2019
However, there are positives. It has a TTM PE ratio of 34 and an earnings yield of approximately 2.8%, according to Simply Wall Street. With backing from the likes of Warren Buffett, it is also still selling a lot of cars coming in second to Tesla for numbers sold in October, according to InsideEVs.