The old saying that the U.S. stock market goes up more than it goes down but goes down faster than it goes up couldn't be truer. In a little over three years, we've seen three major sell-offs that all transpired in a matter of weeks. They are the U.S.-China trade war sell-off in late 2018, the COVID-19 pandemic induced sell-off in March 2020, and now the current sell-off.
Despite reporting record earnings after market close on Wednesday, Tesla (TSLA 2.31%) and other electric car companies like Lucid Group (LCID 5.04%) and Rivian Automotive (RIVN 4.74%) saw their stock prices tumble on Thursday and Friday. Here's how Tesla's results and management's commentary affect Lucid and Rivian.
Image source: Tesla.
Lucid isn't immune from a potentially challenging year for the auto industry
Daniel Foelber (Lucid): If you're new to investing, it can seem confusing when an industry-leading company like Tesla reports incredibly impressive results, but its stock price gets crushed anyway. Some of that has to do with expectations leading into the report. But most of the time, it has to do with management's guidance for the quarters to come.
There's no denying that Tesla's business is in its best shape of all time. It delivered 87% more vehicles in 2021 than in 2020, grew year-over-year full-year revenue by 71%, earned $5.52 billion in net income, and generated over $5 billion in free cash flow despite incurring more than double the capital expenditures in 2021 compared to 2020 due to factory build-outs in Texas and Germany.
It also finished 2021 with a full-year operating margin of 12.1% and a record-high quarterly operating margin of 14.7%. Tesla's industry-leading operating margin continues to be one of the company's biggest competitive advantages. It is the result of strong demand for its vehicles, virtually nonexistent advertising costs, and production efficiency.
However, there were some major red flags in the earnings report and conference call. The operating margin could have been a few percentage points higher if it weren't for massive stock-based compensation for CEO Elon Musk, higher logistical costs due to supply chain issues, and higher costs for parts and services due to inflation. Tesla, which had been navigating the global chip shortage arguably better than other automakers, signaled that it now expects the issue to persist throughout 2022. "In 2022, [the] supply chain will continue to be the fundamental limiter of output across all factories," said Musk during the company's Q4 2021 earnings call on Wednesday.
Tesla's results and management's commentary indicate that other companies like Lucid could have a difficult time getting their production off the ground in 2022. As of Q3 2021, Lucid reported over 17,000 reservations across the four trims of its Air luxury electric sedan line, so the demand is clearly there for it to reach its goal to produce and deliver 20,000 vehicles this year. However, Lucid only began delivering its most expensive version of the Air, the Air Dream Edition, in late October and has yet to announce meaningful deliveries of the second most expensive option, the Grand Touring. Tesla's cost concerns could indicate that Lucid will face challenges and higher than expected input costs as it attempts to produce low volumes of four different versions of the Air.
Another point of concern is shipping and logistics costs. Lacking a sophisticated distribution system, Lucid could face bottlenecks on the customer delivery side of its business as it attempts to ship vehicles across the country.
In sum, supply chain challenges and an ongoing chip shortage are serious threats that could impede Lucid from hitting its 2022 goals. Or even if it does, it could deplete its cash position much quicker than expected.
Rivian's situation isn't like Tesla's, but there's some overlap
John Rosevear (Rivian): This might be oversimplified, but I see two big takeaways from Tesla's fourth-quarter earnings report.
- Tesla's getting good prices for its vehicles right now, and that drove nice operating margins last quarter.
- Tesla is facing some big challenges in the near term, including rising competition, supply chain woes, and a new-product drought.
The first bullet point won't be a factor for Rivian for a while. It'll be at least a couple of years before the company has the scale to generate positive operating margins, much less Tesla-sized ones.
But that said, Rivian is facing its own challenges in the near term, and some of them do overlap with Tesla's.
Like Tesla (and just about every other automaker), Rivian has been struggling with supplier issues amid the ongoing COVID-19 pandemic and a related global shortage of automotive-grade semiconductors. Those supply chain woes caused Rivian to miss its own modest 2021 production guidance: Rivian had told investors that it expected to build about 1,200 vehicles in 2021, but it was able to complete just 1,015 before year-end.
(I think that miss is no big deal in context, but Rivian's communications around it could have been better. Let's hope that's a lesson learned.)
What about competition? Tesla's stock is priced for absolute global domination; any signs that the "legacy" automakers can build competitive electric vehicles at scale are arguably bearish. Rivian, to its immense credit, doesn't have that problem — first, because nobody is expecting Rivian to sell 20 million vehicles a year any time soon, and second, because it has staked out an interesting, profitable, and unique niche with its first two products.
Rivian's R1T pickup and the related R1S SUV are aimed at an upscale, outdoorsy crowd -- a market niche that the company might have to itself for a while. Image source: Rivian Automotive.
Simply put, Rivian is courting the kinds of customers who might also be drawn to upscale apparel maker Patagonia. Like Patagonia, Rivian's products are premium-priced, tailored for an outdoor lifestyle, and well-made. While other automakers offer products that occupy somewhat similar spaces in the market, nobody has aimed directly at that niche like Rivian — and certainly not with pure-electric vehicles.
To be clear, that's not a moat. In time, if Rivian is successful, direct competition will arrive, just as it's arriving now for Tesla. But that will probably take at least a few years. That's time that Rivian can use to turn its promising start into a sustainable business — just like Tesla did with its original Model S and Model X.
Two exciting companies that are worth following
Lucid and Rivian remain high-risk, high-reward options in the EV space. Share prices of both companies are down over 60% from all-time highs. But to be clear, Lucid's $44 billion valuation and Rivian's $49 billion valuation are still extremely expensive for companies that are years away from positive operating income.
However, the market is different today than it used to be. Lucid and Rivian both have tons of cash on their balance sheets. As long as the investment thesis remains intact, both companies should find it easier to raise more cash if needed -- a luxury Tesla wasn't afforded when it was building out its business a few years ago. That's because industry sentiment has shifted in favor of EV investment. Even the legacy automakers are seeing the potential in EVs -- and investing billions accordingly.
For investors that have been waiting to pick up shares of Lucid and Rivian, now good be a good time to open a starter position, but only if you're OK with the stock falling much further and waiting years for the investment thesis to play out.
