OUR THESIS:
As of this writing, shares of Tesla (NASDAQ
– TSLA), the undisputed bellwether stock for the electric
vehicle market trades at $1121 per share. At current prices, the
market cap is over $207 billion, representing over 5 estimated 2021
sales and a whopping 98x next year’s EPS. In many investors’ minds,
where Tesla goes, so goes the industry segment, especially as it
relates to the capital markets. While TSLA is the industry’s most
important company, it is the exact mid-point of 2020, not 2016, and
therefore is not the only pubco in the space. In fact, some under
the radar firms with exposure to the space offer major upside that
may rival TSLA, with varying risk profiles and share prices.
Instead of making the case for the industry and its constituents in
the lithium, fuel cell, and other segments, we have elected to
focus on the vehicle producers, where we believe the greatest
attention and upside exist.
THE EV MARKET: A BRIEF HISTORY
We began writing about the EV market in 2015/2016 and while
going over our old reports and blogs, we came across some striking
information. In 2016, Bloomberg New Energy Finance (now billed as
Bloomberg NEF) projected that by 2040, EV passenger sales will
reach 41 million units. Typically, these forecasts are shaved as we
get closer to the target year. Given the broad-based popularity
amid the varying types of vehicles available, these estimates have
been dramatically raised to 54 million. To put this in perspective,
the new forecast is 34% higher than the earlier figure. In 2020,
the sales figure is projected to reach 1.7 million, jumping to 8.5
million in 2025, post-the current COVID-19 pandemic. If reached,
the 8.5 million number is 4x the 2020 estimated figure and a
whopping 17.9x the roughly 450,000 sold in 2015.
Early Drivers
Many of the early drivers of the market are valid today and much
like early prognostications have proven demand and pricing are in
investors’ favor. Early on, the utilization of lithium-ion
batteries helped spark the nascent industry, even with limited
supply and even more limited production facilities which prompted
high prices, ahead of expected demand. With economics not yet in
favor, subsidies to procure hybrid electric and full electric
vehicles aided the growth of the industry and caught the attention
of early adopters who were seeking eco-friendly vehicles over form
and comfort.
Over time, battery density and performance improved as did
production, pricing, and style. A proliferation of charging
stations helped the cause as did the introduction of eco-friendly
fleets and international policy pronouncements to dramatically
reduce carbon emissions.
Today’s Drivers
While early drivers often looked to the future for critical mass
of lithium-ion supply, mass market pricing, and the broad
introduction of electric passenger and multi-passenger vehicles
around the world, these drivers are in force today. A 2020 report
by the aforementioned Bloomberg NEF offers key statistics and
insights that identify key factors poised to advance substantial EV
penetration across markets and vehicle types.
Technological capabilities combined with a substantial decrease
in lithium-ion battery costs could not come at a better time for
the segment, as the price tag for EVs will approach that of their
internal combustion brethren in the next 3-5 years---even without
government subsidies. In anticipation of this pricing parity, 31
nations in the Eastern Hemisphere and 13 in the Western Hemisphere
have plans to discontinue sales of new internal combustion vehicles
during this decade.
Most investors tend to be focused on passenger EVs or commercial
vehicles such as buses. However, perhaps the greatest opportunity
lies in the two and three wheeled vehicles such as motorcycles,
scooters, and mopeds. Emerging market countries’ major cities have
significant population density which makes the proliferation of
these smaller electric vehicles a godsend as they lower emissions
(pollution) and can operate more nimbly in traffic than passenger
or larger, commercial passenger EVs. Perhaps this is why
expectations are for two wheeled EVs could represent 40% of the
total two wheeled market in 2030, versus 28% for passenger
vehicles. While China is a leader in the production and utilization
of these non-traditional electric vehicles, major market
penetration by multiple players appears to lie ahead. According to
the Bloomberg NEF report:
“Looking beyond passenger cars, several ‘killer apps’ are
emerging for electrification in the 2020s. Two- and three-wheeled
vehicles (scooters, mopeds, motorcycles, tuktuks and rickshaws) and
municipal buses are already going electric quickly and accelerate
further in the next five years, spreading beyond China.
Delivery vans and ride-hailing vehicles are the next
segments to cross the tipping point.
Some 30% of global two- and three-wheeler sales and 20% of
the existing fleet are already electric. China accounts for the
bulk of two-wheeler electrification to date, but sales are growing
rapidly in markets like Taiwan, Vietnam, and India. Supportive
policies, rising manufacturer interest and rapidly improving
economics will soon push two- and three-wheeler electrification
significantly higher.
In 2040, the electric two-wheeler sales share reaches
77%, and the electric fleet share
reaches 47%."
Even three wheeled vehicles are projected to reach cost parity
in the next few years, as evidenced by this graph regarding the
market in India.
One interesting by-product of EV production is the concept of
carbon credits. The State of California and ten others mandate that
a portion of automakers’ annual sales produce no tailpipe exhaust,
creating an opportunity for EV producers such as Tesla to sell
credits it does not need to big carmakers who come up short. It
also sells credits to manufacturers who do not meet federal
Corporate Average Fuel Economy requirements.
This is a concept used globally in large scale eco-friendly
power projects. According to Forbes: “Tesla booked $2.3 billion
of ZEV (Zero Emissions Vehicles) and U.S. emissions credits from
2008 through 2019, with more than half of that coming just in the
past three years, based on company data compiled
by Forbes.” Since this maneuver does not have an
associated cost, it generates 100% operating profit and is a model
that can be replicated by savvy EV producers in markets around the
world.
TESLA: KING OF THE HILL
Tesla Inc. (NASDAQ
– TSLA - $1119.63- NR) is the undisputed
800-pound gorilla in the EV market and its most favored and
controversial son. The Company seeks to dominate the passenger
market with high end, mid-range and now truck style vehicles,
leveraging its unparalleled battery production capabilities as
well. According to the website, Tesla, Inc. designs, develops,
manufactures, leases, and sells electric vehicles, and energy
generation and storage systems in the United States, China,
Netherlands, Norway, and internationally. The Company operates in
two segments: Automotive and Energy Generation/Storage.
The Automotive segment offers sedans and sport utility vehicles.
It also provides electric powertrain components and systems; and
services for electric vehicles through its Company-owned service
locations, and Tesla mobile service technicians, as well as sells
used vehicles. This segment markets and sells its products through
a network of company-owned stores and galleries, as well as through
its own Website. The Energy Generation and Storage segment offers
energy storage products, such as rechargeable lithium-ion battery
systems for use in homes, industrial, commercial facilities, and
utility grids; and designs, manufactures, installs, maintains,
leases, and sells solar energy generation and energy storage
products to residential and commercial customers.
The stock is up over 160% this year and now boasts the largest
market cap of any auto maker. With recent deliveries data slated to
be released soon, investors are monitoring sales and indications of
future interest closely, along with progress on the self-driving
side which will help boost potential value even higher. Still, how
much more upside exists based on its 2020 YTD rise?
NIKOLA: FRESH AND BOLD AND TESLA JR.?
Nikola Corporation (NASDAQ
– NKLA - $65.90 - NR), which makes
battery-electric and hydrogen-powered trucks, began trading on June
4th after a reverse merger with VectoIQ, which is a publicly-traded
special purpose acquisition company headed by former vice chairman
of General Motors Stephen Girsky. Nikola said that its electric
pickup truck pre-orders represent more than $10 billion in revenue,
but it remains to be seen if these orders will come to fruition.
Upstarts including Tesla have had their own issues with delivery so
risk abounds here. Plus, Tesla, General Motors and Ford are among
the other companies that have announced plans to produce
all-electric pickups, potentially saturating the market.
This presently non-revenue generating company has a market cap
exceeding $23 billion and has become the latest EV darling. While
stock higher prices could be in the cards, it seems that even a
small slip-up could curtail current enthusiasm, as evidenced by the
recent extreme volatility.
WORKHORSE: ATTRACTIVE MODEL WITH BIG UPSIDE
Like Nikola, Workhorse Group Inc. (NASDAQ
– WKHS - $19.18 - NR) has become a darling of
late and is up nearly 200% year-to-date. With a $19 share price and
$1.3 billion market cap, WKHS seems to have more going for it
revenue-wise in the short term. Wall Street expects revenue to grow
from $23M in 2020 to $147M in 2021. The Company designs,
manufactures, builds, sells, and leases battery-electric vehicles
and aircraft in the United States. It operates through two
divisions, Automotive and Aviation. WKHS also develops cloud-based
and real-time telematics performance monitoring systems that enable
fleet operators to optimize energy and route efficiency. Its
products include electric cargo vans, and medium and light-duty
pickup trucks, as well as HorseFly delivery drones systems.
The Company’s stock has benefitted from news that its EV
delivery vans passed government safety tests. And, EV start-up
Lordstown Motor is slated to introduce its new electric
light-duty pickup truck. Workhorse owns a 10% stake in Lordstown
Motor, so there may be hidden value here. The kicker is that
Workhorse will be producing its safety certified delivery vans for
Ryder UPS and is bidding on the U.S. Postal Service’s business.
Based on this pipeline and hit list, WKHS appears to offer better
value and risk/reward than both Tesla and Nikola.
ALTERNET: UNTAPPED MARKET, INNOVATIVE APPROACH
Big Opportunity, Limited
Competition
Alternet Systems Inc. (OTC
– ALYI - $0.0092 – Spec Buy) is one of the more
intriguing companies in the space and certainly is positioned as
the low-cost alternative to the $1120/share Tesla for investors
seeking a high reward, albeit greater risk opportunity. The Company
is focused on electric transportation solutions for the shared-ride
market, namely its $300 million electric mobility initiative
in Africa.
Alternet’s CEO, Dr. Randell Torno, has stated publicly that
he believes the immediate opportunity for electric powered
transportation growth in Africa by far exceeds the
electric powered transportation opportunity anywhere else in the
world and that the electric mobility technology innovations that
will be developed for Africa will ultimately form the
foundation of commercial electric powered transportation
everywhere.
The Company’s first project is to produce the ReVolt
Electric Motorcycle for the shared-ride market in Africa,
along with the organization and promotion of the first African
electric mobility technology conference and symposium targeted for
the first quarter of 2021. Alternet emphasizes that the subject of
electric transportation is far greater than the mere replacement of
fossil fueled cars with electric powered cars. For instance,
Volvo, Hyundai, Aston Martin, and Porsche, have electric powered
vertical take-off and landing (VTOL) initiatives in the works.
In addition to product sales, ALYI intends to generate
additional annual revenue via this annual electric mobility
conference and symposium that includes a major brand name anchor
event. The developing ALYI annual African electric mobility
technology conference and symposium in Nairobi, Kenya is designed
to advance the deployment of electric powered transportation
solutions specific to Africa. The focus includes environmental
sustainability and overall transportation efficiency applicable to
the African transportation infrastructure, economy, and
consumers.
Innovative Funding, Increased
Valuation
Earlier this week, Alternet announced that it will receive up
to $2.5 million in advance of a $25
million first tranche investment agreement currently committed
under a letter of intent (LOI). This letter of intent (LOI) for
a $25 million first tranche investment is itself
in advance of a planned initial coin offering (ICO) to fund the
aforementioned $300 million initiative. The pre-funding is
intended to support the initiation of immediate efforts necessary
to prepare for the inaugural electric mobility event next
year. The funds will be provided as a loan convertible into
the $25 million first tranche investment. The total
first tranche investment agreement is anticipated to be completed
within the next 90 days and is structured at a $50 million
pre-money valuation of ALYI in consideration of the company’s $300
million electric mobility initiative. The $25 million first tranche
investment represents a valuation of ALYI common stock at
approximately $0.05 per share, a roughly 5x increase from current
prices. Clearly, with the ability to raise substantial,
alternative, non-dilutive financing to proceed with an enviable EV
shared ride initiative, upside in the Company’s overall valuation
dwarfs the other companies mentioned in this snapshot.
Senior Analyst: Robert Goldman
Rob Goldman founded Goldman Small Cap Research in 2009 and has
over 20 years of investment and company research experience as a
senior research analyst and as a portfolio and mutual fund manager.
In addition to his work leading GSCR, Rob serves as the Director of
Research for Marble Arch Research, Inc. During his tenure as a sell
side analyst, Rob was a senior member of Piper Jaffray's Technology
and Communications teams. Prior to joining Piper, Rob led
Josephthal & Co.'s Washington-based Emerging Growth Research
Group. In addition to his sell-side experience Rob served as Chief
Investment Officer of a boutique investment management firm and
Blue and White Investment Management, where he managed Small Cap
Growth portfolios and The Blue and White Fund.
Analyst Certification
I, Robert Goldman, hereby certify that the view expressed in
this research report accurately reflect my personal views about the
subject securities and issuers. I also certify that no part of my
compensation was, is, or will be, directly or indirectly, related
to the recommendations or views expressed in this research
report.
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