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U.S. stock markets jumped to record highs on Thursday, as investors belatedly recognized that the Fed’s 50-basis point rate cut is not so bad after all. Legacy automakers and pure-play electric vehicle (EV) stocks traded on a mixed note, though. While Tesla (TSLA) – whose flamboyant CEO Elon Musk has blamed the Fed’s rate cuts for much of the company’s woes – rose sharply, Ford (F) and General Motors (GM) both closed in the red. In the startup EV space, while Rivian (RIVN) closed in the green, Lucid Group (LCID) stock went south.
The Fed’s rate cuts are positive for the auto and EV sector in general, as higher rates were hurting vehicle sales. However, I believe that Nikola (NKLA) and VinFast (VFS) are two EV names to sell, despite the easing monetary policy.
VinFast Stock Looks Too Pricey
Vietnam-based VinFast (VFS) is among the more recent entrants into the listed EV space. Like most other companies that went public through a special purpose acquisition (SPAC) reverse merger, VFS is also a boom-to-bust story.
The stock soared after its listing, and printed as high as $93 – which gave the startup EV company a market cap of over $200 billion. While those numbers sound outright outrageous, the current valuations don’t sound much more reasonable.
VinFast has a market cap of over $9 billion, and reported a total debt of over $3 billion at the end of Q1. The company also owes around $2.4 billion to related parties. It trades at a next 12-month (NTM) enterprise value-to-sales multiple of almost 5x, which is much higher than Chinese EV companies like NIO (NIO), Xpeng (XPEV), and Li Auto (LI), as well as domestic rivals like Rivian. While the bullish argument might be that VinFast’s valuations are low compared to market leader Tesla, that doesn't really stand up to closer inspection, given the stark differences in their financials and brand.
VinFast, which was initially looking to deliver 100,000 cars in 2024, has since lowered that guidance to 80,000 - and even that might appear a bit too high, as it has delivered only 21,747 cars in the first half of the year.
Why VFS Stock Looks Like a Sell
VinFast cars haven’t really received rave reviews, nor does the company have any cost advantage – at least in the U.S. markets, where its offerings look like a “me-too” product at best in an increasingly overcrowded market. It does have a strong position in Vietnam, but there’s a catch. Over 70% of its scooter sales, and half of its passenger vehicles in 2023, were made to Green and Smart Mobility (GSM), which is a taxi rental company established by VinFast’s parent company, Vingroup. For me, the bulk of a company’s sales going to a related party is about as red a flag as there can be.
With Chinese companies looking to aggressively expand in Southeast Asia, VinFast won’t have an easy ride in that region, anyway. VinFast's financials are quite weak, and it reported a gross profit margin of nearly -50% in Q1, while its net loss was over twice its revenues - not the kind of numbers any company might want to boast about. Overall, given its precarious financials, me-too product proposition, and high valuations, I find VFS to be an EV stock worth selling at these prices.
NKLA Stock Also Looks Like a Sell
While VinFast stock is comfortably above its record lows, Nikola (NKLA) has been falling to record lows, and now has a market cap of just over $230 million. Unlike VinFast, which has the “unyielding support" of its parent Vingroup, Nikola has been a frequent visitor to capital markets.
Last month, the troubled company sold yet another convertible bond, raising gross proceeds of $80 million, and said that it intends to sell another $80 million worth of convertible bonds, subject to shareholder approval. We can be pretty sure that this won’t be the last capital raise for Nikola, whose outstanding share count has exploded since its 2020 listing.
To be fair, while Nikola’s valuations don’t look that terrible - it trades at an NTM enterprise value-to-sales multiple of 1.15x - its continued cash burn and recurrent capital raises make it a risky proposition.
The company does have the first-mover advantage, as the only Original Equipment Manufacturer (OEM) with Class 8 hydrogen trucks commercially available in North America, and has also started realizing revenues from sales of regulatory credits. However, I believe this is one name that investors can steer clear of, as there are other EV stocks with much better risk-reward than Nikola.
On the date of publication, Mohit Oberoi had a position in: TSLA , F , GM , RIVN , LCID , NIO , XPEV , LI . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
