Why Tesla and Rivian are outstripping the competition

Tesla Cybertruck Rivian R1T

You may have heard that Tesla, with a market capitalization of $1.021 trillion, is worth more than Toyota, VW, GM, Ford, Mercedes, BMW and Chrysler combined. Rivian, a new American electric truck maker, which has delivered fewer than 1,000 cars to customers, has a market cap of $100 billion — well ahead of GM, Ford or Chrysler. Does that make any sense? While I believe electric vehicles to be the future, it is hard for me to grasp that Rivian is already ahead of every U.S. automaker, save Tesla, in market capitalization.

But to understand this, think back to 1905. Horse-drawn carriages had been around for more than 1,000 years. They were common, reliable and the standard transportation of the day. A horse could eat most anywhere, and virtually all inns had a stable out back to take care of the horses.

If you were to invest, would you buy the Hume Carriage Co., the Smart Carriage Co. or Hollander Rockaway? All were quality carriage makers of the day, likely paying steady dividends.

Or would you invest in a scrappy start-up like Henry Ford, which made these new noisy, stinky “horseless carriages,” with few places to buy gasoline.

And if they were to break down, which they often did, who would fix them?

Well, you likely have never heard of any of the aforementioned carriage companies, and if you were to have invested in them you would have lost everything. Ford, however, was a success in the 20th century — as were GM and Chrysler. And thus began a new era of internal combustion automakers.

Another way to look at why Tesla and Rivian have such high valuations is to look at reported financials, which is quite telling. For this exercise I looked at third quarter results for Peabody Energy (the No. 1 U.S. coal producer), Eastman, Tesla and GM.

How have sales grown over the past four years? Peabody is down by over 50%, GM is down 26%, Eastman has grown 10%, and Tesla has grown nearly fourfold. In 2017, Tesla’s sales were about the same as Eastman, and today they are nearly four times larger than Eastman, at $13.7 billion last quarter.

Another metric I looked at is free cash flow — how much money do they make on their core business. I find this more stable than profit, which often gets hit with one-time charges and investment quirks. Peabody and GM have dropped into negative free cash flow, basically consuming capital. Eastman shows a 16% increase over the past four years to $430 million, and Tesla appears to be printing cash, going from a $1 billion loss in 2017 to nearly $7 billion in free cash flow last quarter — more than double Eastman’s total sales last quarter.

I also look at investments. Tesla has been investing heavily in plants and equipment as well, up a strong 84%, with GM up a modest 13%, Eastman up slightly at 8%, and Peabody showing a 42% decline over the past four years.

Production is quite telling as well, as Peabody has seen a 35% decline in tons of coal sold, and GM has seen a 43% drop in vehicles sold, while Tesla has seen nearly a tenfold increase in production from 26,150 cars in the third quarter of 2017 to 238,000 cars sold last quarter. With large new plants in Austin, Texas, and Berlin, Germany, coming online soon, I see Tesla continuing its strong 50+% growth over at least the next several years.

Employment is another telling metric, with Peabody showing a 35% decline, GM a 14% decline, and Eastman with flat employment, while Tesla has more than doubled its employee count over the past four years.

So yes, I see why the stock market is rewarding Tesla and Rivian, as many see them as strong growth platforms for the future.

How about you? Are you investing in the companies of the past or the companies of the future?

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