For nearly a year, stock market volatility has been well above historical norms. However, this hasn't bothered millennial and novice investors one bit.
Robinhood, the online investing app known for offering commission-free trades and giving shares of stock to new users, added roughly 3 million new users in 2020. This is noteworthy given that the average age of Robinhood's users is 31. The platform has become a magnet for young investors to put their money to work in the market.
It's great to see millennials investing in the greatest long-term wealth creator on the planet. At the same time, it's terrifying to see what they're buying. On Wall Street, the phrase "Robinhood investor" has become synonymous with young traders chasing momentum or penny stocks, rather than quality companies.
A quick look at Robinhood's leaderboard (i.e., the most-held companies on the platform) shows that its users are head-over-heels in love with one trend in particular. It used to be cannabis or travel stocks, but today's young investors have since pledged their love (and money) to renewable and alternative energy stocks.
Robinhood investors are obsessed with this trend
Recently, Tesla (TSLA -5.00%) overtook Apple to become the most held stock on the entire Robinhood platform. Tesla has become the first auto company in over five decades to successfully build itself from the ground up to mass production. The company delivered nearly 500,000 electric vehicles (EVs) in 2020. During its Battery Day presentation in September, it outlined how its battery technology will outpace its competition in range, capacity, and power. Considering how quickly Tesla's stock has catapulted higher, it's easy to see why it has the attention of Robinhood investors.
They also really love NIO (NIO -2.57%), which has clawed its way to the No. 3 spot on Robinhood. The China-based EV manufacturer recently announced that its December deliveries topped 7,000, putting it on pace for an annual delivery run-rate of more than 84,000. Management has previously said that it will aim for a delivery run-rate of 150,000 in 2021.
NIO's battery-as-a-service (BaaS) program is also highly innovative. In exchange for an upfront reduction in the cost of its premium EVs, customers pay a monthly fee and can upgrade or replace their batteries in the future. NIO is essentially trading some near-term revenue for higher margins over the long run.
Hydrogen fuel-cell solutions provider Plug Power (PLUG -5.36%) has also pushed its way into Robinhood's top 10. Plug Power has skyrocketed after securing a partnership and equity investment with South Korea's SK Group and forging a joint venture with Renault to target the light commercial vehicle market in Europe. It also doesn't hurt that the company's GenDrive forklifts have been especially popular among major retailers like Amazon and Walmart.
With Democrats now in control of the legislative branch of the federal government, there's an increased likelihood that renewable energy will take precedent in upcoming legislation. In addition to Tesla, NIO, and Plug Power, Robinhood investors have also piled into FuelCell Energy, Nikola, Ideanomics, Workhorse, Blink Charging, Li Auto, XPeng, and Electrameccanica Vehicles. All of these companies are in Robinhood's top 100.
It looks like a bubble
There's little question that EVs are the future of the automotive industry, or that clean energy solutions like hydrogen fuel cells, solar, and wind power are going to be used to a greater degree. Yet the valuations currently bestowed on these companies are jaw-dropping. Momentum-chasing millennials may be setting themselves up for disaster.
For example, Tesla ended last week with a valuation that topped $800 billion. That's more than most of the traditional auto stocks combined. What's unnerving about this valuation is that Tesla, an $800 billion company, hasn't yet shown that it can generate a recurring profit from selling EVs. Although it's delivered an adjusted profit in each of the past five quarters, it would've reported a loss in four of those quarters without the revenue generated from selling renewable energy credits.
It's also a bit of a stretch to assume that Tesla will retain its technological advantages for a lengthy period of time. General Motors and Ford are both investing $27 billion and $11 billion, respectively, in EVs and autonomous vehicles. GM is planning to launch 30 new EVs before the end of 2025. The deck is stacked against Tesla maintaining a forward price-to-earnings ratio of around 200 in what's traditionally an industry with mediocre margins.
Many of these same concerns can be shared with NIO. Even though China is the largest auto market in the world, NIO has a market cap of $96 billion and has made a little over 75,000 EVs since inception. It could be years before NIO's BaaS program and capacity expansion begin to pay dividends.
As for Plug Power, it's valued at an astronomical 70 times sales for 2021. Even accounting for its two major joint ventures and ongoing success for GenDrive at the retail level, it looks to be at least three years away from turning the corner to profitability, and even then would be at more than 30 times sales.
Historically, next-big-thing investments have a way of getting overextended to the upside and letting down the lofty expectations of Wall Street and investors. My suspicion is that's what going to happen with many of these renewable energy names. This doesn't mean they can't be long-term winners, but these valuations look wholly unsustainable in the short run.