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- In 2020, at least seven EV startups have gone public through mergers with special-purpose acquisition companies, and an eighth has said it’s close to finalizing a deal.
- Only one of those eight companies has delivered even a single vehicle, and some don’t plan to begin deliveries until 2022.
- Still, some of the startups have higher stock prices than Ford.
- Three experts told Business Insider the wave of pre-revenue EV startups going public through SPAC mergers reminds them of the late 1990s dot-com bubble.
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The auto industry has long been a notoriously difficult environment for startups. Tesla is the only US automaker selling vehicles on a large scale that was founded after 1925.
“Over the last decades, there’s been well over a dozen electric-vehicle companies that haven’t survived,” said Garrett Nelson, an analyst at CFRA who covers the auto industry. Graveyard residents include Better Place, Fisker Automotive, Coda, and Bright Automotive.
But a new generation of EV startups is betting that a global transition from internal-combustion engines to electric motors will create openings for tech-focused firms without the institutional baggage and conservative mindsets of traditional automakers. Many of them have capitalized on soaring interest in the stocks of EV makers Tesla and Nio by going public through mergers with special-purpose acquisition companies (SPACs). Like traditional IPOs, SPACs allow startups to raise large sums of money to fund their growth plans. But they give startups a number of advantages traditional IPOs don’t always offer, including speed, convenience, and credibility.
Last year, at least seven EV companies have gone public through a SPAC or announced plans to do so. An eighth, Faraday Future, said in October that it’s in advanced talks to team up with a SPAC. Of them, only one, Canada’s Lion Electric Company, has delivered even a single vehicle. Some don’t plan to start until 2022.
Despite the lack of paying customers, some of these startups have raised hundreds of millions of dollars at multi-billion-dollar valuations and have share prices that exceed Ford’s. Fisker Inc. (led by Henrik Fisker, whose previous EV startup, Fisker Automotive, went bankrupt), raised $1 billion when it went public in October and traded at $16 when markets closed on Friday (Ford closed at $9). Lordstown Motors brought in $675 million from its SPAC deal and traded at $19 at the end of Friday.
“Most of these companies are more like business plans, not businesses,” Nelson said. He expects few will survive.
That kind of competitive dynamic is common in the private markets, where new companies often try to build a strong customer base before subjecting themselves to the scrutiny brought by the quarterly financial reports required of public firms. What’s different now is that many young EV firms are going public well before they’ve proven they can make a product — let alone a profit.
Nelson and two other experts who follow the auto industry told Business Insider they think the stampede of EV startups going public through SPACs has created a speculative bubble similar to the one formed by internet companies in the late 1990s. In both cases, investors bet big on firms with little or no revenue.
The dot-com bubble burst in 2000, taking many web startups with it. The same could happen with new EV companies, the three experts said.
“The smaller startups really could get decimated,” said Ed Kim, an analyst at AutoPacific.
Stock Market Starting a car company isn’t easy
The newly public EV startups will face a number of challenges. One is the economics of selling cars.
Unlike software companies, automakers need factories, machinery, and people to oversee them. After they’ve spent the money needed to build and tool their plants, they still have to buy, assemble, and deliver parts for each vehicle they sell. That combination of high overhead and massive complexity produces thin margins, and explains why it’s so difficult for new automakers to survive.
Some startups, like Fisker and Canoo, are trying to avoid the massive up-front costs factories require by paying suppliers to build their vehicles, but that kind of outsourcing may have limitations, said David Whiston, an analyst at Morningstar.
“I think that works in low volume,” Whiston said. “I’m just skeptical you can do contract manufacturing and make 3 million, 5 million, 10 million vehicles at high quality every year. I think at some point you need to take your manufacturing in-house to do that.”
Another challenge: demand. EVs account for around 2% of light-vehicle sales in the US and, while experts predict consumers will eventually buy more EVs than gas-powered vehicles, that transition will take decades. During the next few years, there will likely be far more electric models available than are needed to satisfy the small but growing interest in them, Kim said.
Stock Market Nikola has dampened some of the hype around EV startups
Already, we’ve seen an example of how quickly investors can sour on an EV startup. Nikola, which is building hydrogen- and battery-powered semi trucks, went public in June after merging with the SPAC VectoIQ. Within days, its market capitalization was greater than Ford’s, despite the fact that its first truck isn’t schedule to arrive until the fourth quarter of this year.
In September, Hindenburg Research said an examination of Nikola and its founder, Trevor Milton, had uncovered a history of alleged misrepresentations and encouraged the firm to sell short Nikola’s stock, which amounts to a bet that its price will fall.
Nikola denied many of the report’s claims but conceded some, including two instances in which the company created the impression that non-operational prototypes of its Nikola One semi-truck could drive under their own power.
Since the report’s release, Nikola’s stock price has declined by 48%, Milton has stepped down from his role as executive chairman, and GM has canceled its plan to invest in the company and build a pickup truck for it (GM will still supply Nikola with fuel cells).
“The halo from them has just been totally obliterated,” Whiston said.
Stock Market Echoes of the dot-com bubble
Twenty years ago, the dot-com bubble contributed to a stock-market crash that led to trillions of dollars of losses for individual investors and their 401(k)s. Though the current wave of mergers between SPACs and EV companies is only a small fraction of the size of the late ’90s tech-IPO market (295 internet companies went public in 1999 alone), it could set off a wave of consolidation in the EV industry and make it harder for even the most promising startups to raise money.
There are a number of factors that could pop the EV industry’s SPAC bubble, according to Whiston, Kim, and Nelson: investors tiring of quarter after quarter of losses, startups failing to gain a foothold in the market while burning through their cash reserves, Tesla’s fortunes taking a turn for the worse, interest rates rising.
When that might happen is anyone’s guess.
“It’s impossible to know when the bubble pops until it pops,” Whiston said.
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