2020 has been an incredible year for EV (electric vehicle) stocks. There has been a sharp rally across the industry, which many see as a possible bubble. There has also been a wave of IPOs in the EV industry, merging with special-purpose acquisition companies (SPACs) being the preferred route. Not to be left back, listed EV companies like Tesla (TSLA), NIO, XPeng, and Li Auto have announced share issuance in December 2020. Why are EV stocks like TSLA and NIO raising so much money?
To begin with, 2020 was a record year for IPOs in terms of the total number of listings and the money raised. In the EV ecosystem, Li Auto and XPeng listed through the traditional IPO process in 2020. Lordstown Motors, Fisker, Nikola, and QuantumScape took the SPAC route. Now, Li Auto and XPeng have announced a share issuance months after the IPO. Tesla and NIO have announced their third share issuance of the year.
Why are EV makers raising so much cash?
We should understand that, with the exception of Tesla, most of these EV companies are burning cash. Given the massive spending NIO, XPeng, and Li Auto are doing on R&D and their expansion plans, they might continue to be unprofitable for the near foreseeable future. Now to bridge the cash burn, they need to raise capital.
Secondly, competition would heat up in the EV industry. Legacy automakers have announced a flurry of new all-electric models that would start hitting the markets. To add to that, pure-play EV makers are ramping up capacity. This would lead to competition between automakers to sell their EVs to consumers. We might see higher spends on advertising, distribution, as well as a price war in the EV industry. Pure play EV makers would need cash to fight out the big automakers.
NIO to issue ADR
Third, the capital raise would help EV makers strengthen their balance sheet. Notably, NIO was fighting a survival battle in 2019 amid its huge debt pile and cash burn. It had to announce a series of transactions to strengthen the balance sheet and reassure the markets about its survival. The capital raise is a kind of insurance for EV makers in the event of an adverse event in the future.
Are Tesla, NIO, Li Auto, and XPeng overvalued?
Fourth, and perhaps more importantly, all EV stocks including Tesla, NIO, XPeng, and Li Auto have rallied this year. The valuations are getting overstretched by all means of imagination. No matter how one sees EV stocks, it is not possible to justify Tesla’s $600 billion market capitalization or, for that matter, NIO’s market capitalization soaring above that of General Motors.
EV companies know their shares are overvalued. While markets are currently optimistic on EV stocks, the tide could turn anytime. It is better for EV companies to raise cash by selling shares at these valuations.
Why is Tesla raising so much cash?
While one may understand EV companies like NIO, XPeng, and Li Auto raising money as they are burning cash, Tesla raising so much money is perplexing. In January 2020, Tesla’s CEO Elon Musk had denied the need for new capital. However, it has announced three rounds of share issuance after that totaling over $12 billion.
Tesla generated positive free cash flows in 2019 and has been generally free cash flow positive this year, too, including in the third quarter of 2020. The company had total cash and cash equivalents of $14.5 billion at the end of Q3 2019 while its total debt was only $8 billion. This would mean a negative net debt of $6.5 billion.
Elon Musk on Tesla’s $5 billion capital raise
Here’s what Musk had to say in the $5 billion share issuance. “We were debating, should we raise money, should we not,” He added, “In the end, we thought we can retire debt and increase the security of the company…probably a good thing. And for less than 1 percent dilution, it probably makes sense. It could have gone either way.” He also said that the money could be used as a “war chest” implying that the company might look at acquisition opportunities.