Are Electric Vehicle Stocks Overpriced? A look at P/E Ratios of leading EV companies

2020 may be forever remembered for the Covid 19 pandemic.  But for investors, it will also be remembered as the year one asset delivered draw-dropping returns. No, we’re not talking about Bitcoin.  In 2020 stocks for electric vehicles began to climb and then kept climbing. Let’s first look at the price growth and innovations of some of the leading EV producers.

Electric vehicle infrastructure took off during the pandemic. While cars must stop at gas stations, electric vehicles can be charged at home or at one of many charging stations that are appearing.  The growing infrastructure supporting EVs is getting investors excited about the potential for outsized returns on EV companies.

Tesla, the most well-known electric vehicle company started the year at $83. By the end of the year it sat at around $411! Considered the Tesla of China, Nio started the year at $3.72. At the turn of the new year it sat at a whopping $48.30.  That’s a 12X growth in less than a year.

EVs are on a Tear

With this jaw dropping growth, EVs must be overvalued.  Let’s look at the P/E ratio of each to ascertain how much EV stock prices are detached from their fundamentals. P/E refers to a company’s share price divided by its earnings per share over the last 12 months. Typically, a P/E ratio for a stock hovers around 15. Toyota, the largest car producer in the world, has a P/E ratio of 14.57. On the other hand, Tesla has a P/E ratio of 967. The volatility of its Chinese analog, Nio, has even surpassed Bitcoin’s! By all indicators these EV companies are massively overvalued.

 Critics have indeed argued that electric vehicles are no longer grounded in fundamentals. This is a criticism similar to the ones laid against Bitcoin in 2017.

But P/E ratios and volatility shouldnt be taken solely as indicators of whether a stock is overvalued.

P/E ratios reflect Investors’ perception that an asset will gain multiple times its value.  Naysayers such as Warren Buff rejected Bitcoin – a speculative asset without earnings –  as nothing more than ‘rat poison.’ A few years later it seems as if Buffet has been proved wrong. Major Wall Street Investors are pouring into Bitcoin, seeing it as a compelling safe haven asset like Gold.

 P/E ratios reflect consumer confidence in the earnings potential of a company.  Investors in Tesla truly believe that electric vehicles will become the widespread mode of transportation in the future. P/E ratio don’t reflect the current earnings of the car company but what investors imagine will be the earnings of the company at some point in the future. Of course Tesla won’t likely be the only winner of the EV revolution so its stock is likely overvalued. We’ll have to wait and see if that vision for Electric Vehicles indeed becomes a reality.