While 2020’s stock market has been a wild ride for most stocks, electric car stocks have been in surging. Tesla shares are up a shocking 400% year-to-date (Morningstar data as of 9/16/2020), and the company is now worth more than nearly every other auto maker…combined.

They may say it’s lonely at the top, but don’t feel bad for Tesla, they have company. Chinese EV maker NIO is up nearly 400% over the same time period. A clean-energy truck company brought a business idea and a sketch to the market renamed themselves “Nikola” (a shameless rip-off of Tesla), and promptly gained 400%, earning a higher valuation than Ford and GM together, in its first frantic days of trading. More EV dreamers are on the way as well.

Investors everywhere have been asking: Why the Hype?

We’re happy to chauffeur readers through some common questions we’re getting:

Is the stock shooting up because it’s a new technology?

It would be a missed opportunity to begin our commentary on electric vehicle stocks and leave out an important origin story: Horse Poop.

The “great horse manure crisis of 1894” described a then-current problem: Horse-drawn carriages were a popular means of transport but left quite a mess. The average horse produces around 25 pounds of manure per day, and the “exhaust” was piling up quickly.

A now-famous publication in The Times — A now-famous publication in *The Times*

Something needed to change with transportation, and the case for cars was growing. Before Henry Ford revolutionized automotive affordability, electric cars outnumbered other vehicles 10 to 1.

In short- Tesla didn’t invent the electric vehicle, they were originally created as far back as 1832. Mileage on many of the Baker Electrics wasn’t an issue either, with some reaching 100 miles per charge. Cost was an issue though:

A quick inflation check tells us that The Light Baker Electric Coupe would cost roughly $75,000 in today’s dollars. Through lower cost (and a few scandals), Henry Ford’s combustion cars took over the vehicle market for the next 100 years.

Only recently did electric vehicles become feasible through tax credits, carbon credits, manufacturing efficiencies, and a growing consumer appetite. But the technology certainly isn’t new the way the internet or digital currencies are.

Does the recent stock split add share value?

A stock splitting 5-shares-for-1 (like Tesla did) is the equivalent of making change for a 5-dollar bill. It doesn’t intrinsically add or lose any company value from the act of splitting. However, Tesla’s stock nearly doubled from its announcement of the split. Many speculate day traders are behind the share price pump:

When a stock splits, the lower price can be more attractive to “retail” investors. However, the recent rollout of fractional share trading didn’t keep small investors away from large stock prices, so this explanation is a bit shallow. Short covering (when people give up on betting against the stock) can be a bit trickier when a stock splits, but that shouldn’t lead to the price action we’re seeing.

Is Tesla a good value as electric car demand grows?

As an investment, it’s truly an alternating current of thought out there:

Our opinion is that the company makes beautiful cars, but the price is way ahead of its realistic value. Although they have a dedicated consumer base, and assets like solar and power walls, their profits have come from selling carbon credits, not vehicle sales. The stock now trades at over 1000x earnings. Sales will have to exceed expectations for a full decade to justify its current price…. Not n easy task when every other manufacturer in the world is gunning for your niche.

Is this a market bubble?

In short- we believe yes. Our suspicion is that most of the stock price appreciation is driven by the idea of trading it for an easy buck or fear of missing out:

Of course, the danger of investing in a bubble asset is that it can be a very, very expensive lesson if you don’t leave before it pops. The below chart rings true with the emotions surrounding a bubble inflation, then burst:

If it is a bubble, where are the picks and shovels of electric cars?

The Goldrush of 1849 brought in over 50,000 people hoping to strike it rich, quickly. Tales of newfound wealth paid off for few, but many were lucky to pay the bills. Anecdotally, however, we all know that you need a pick and a shovel to mine for gold, and general stores made a guaranteed fortune by selling basics to the speculators. Tales abound of how even the wives of miners earned more by doing people’s laundry, than the husband did actually searching for gold. Levi’s Jeans started in 1953 selling to new California residents and miners, and they’re still around nearly 200 years later.

In short- in every gold rush, there will be supporting companies that emerge as clear winners by selling service and parts to the competitors rather than going against them. With electric cars, one might expect lithium miners, battery producers, or software designers to do well as the world moves towards electrification. You might be shocked as to who the long term winners will be.

Free of Charge: Our Take on Tesla and the Electric Car Stock Rage