The media loves to hype "market cap" as being some measure of a company's value. It isn't.
The pump-n-dump people are going wild lately. You may recall I wrote about how the scheme works. Years ago, a kid in New Jersey, not even old enough to drive, bought a list of a million e-mail addresses for a few dollars. He then went and bought stock options on some obscure penny-stock that had a name that sounded technical - and similar to that of a major corporation making headlines. He then sent out an "investment letter" to those millions of e-mail addresses, touting the stock.
The next day, some chumps - not many - spent a few hundred dollars each, buying these penny stocks. The price doubled - from 15 cents to 30 cents - and he cashed in his options, making tens of thousands of dollars. The day after, well, the stock price tanked and those idiots who followed his advice each lost a few hundred bucks.
Illegal? Hell yea. But the SEC is understaffed and when they showed up at his door, with a fine of $25,000, his only comment was, "do you take a check?" Because by then, he had made well over ten times that amount, playing this same con, again and again. All his parents said was, "He does something up there in his room with computers. Not sure what, but he says he's making money, so we leave him alone!" Nice parents.
I received many of those e-mails back in the day (1990's) before there was such as thing as a SPAM filter. It was kind of annoying. Yet, I recall at the time wondering, "Maybe I should..." - then I came to my senses. Today, it is far less prevalent - by e-mail. But Social Media offers a chance to hype stocks - anonymously - and reach an audience of millions, without even having to pay for a mailing list! Sites such as Reddit allow you to set up "subreddits" hyping stocks - subreddits that you might even moderate, so you can delete any negative comments about your scheme. Why doesn't the SEC clamp down on this? Again, lack of resources. And no one cares if some stupid chump spends $500 on Gamestop "Stonk" and loses it all.
Of course, I have digressed quite a bit from my topic. Or have I? You see, one of the stocks these "Stonk" promoters have been hyping is Sears Holdings and Sears Holdings Canada. The stock is worth pennies, or in one case, a penny. They mentioned the stock online and the price doubled overnight to two cents.
Now, forget for a minute about price ranges. Sure, stocks like Tesla are like $1000 a share. Usually when that happens, companies do a "stock split" to make the share price "more affordable" or so they claim. It is a weird thing, because you can buy and sell a fraction of a share online, so share value, in terms of number range (pennies, dollars, hundreds of dollars, thousands of dollars) is really pointless. I could make a company with one share of stock that sells for a million dollars, with most people owning only a millionth of a share. It is no different than having a million shares selling for a dollar each.
But there is perhaps something psychological going on here. People look at a stock selling for 50 cents a share and think the company is worthless. But if there are a Billion shares outstanding, well, it isn't entirely worthless,is it? That doesn't mean it is worth a half-billion dollars, though.
Which brings us to today's topic - Market Cap.
When Sears Holdings (or whatever) went from a penny a share to two cents a share, does that mean the value of the company doubled overnight? I ask this question as some folks are particularly dense when it comes to "Market Cap". And folks in the media are often this dense - or this deceptive - as they love to use "Market Cap" to generate click-bait headlines. And you've seen them all. "Tesla is now worth more than Ford and GM combined!" "Apple is worth more than the combined wealth of all the crowned heads of Europe!" (the latter not hard to do, lately). Or take this recent one, "Lucid Motors now worth more than Ford!"
Um, really? Again, "Market Cap" is measured by taking the number of outstanding shares and multiplying it by the price the last sucker paid for a share. It doesn't mean all those shares are "worth" that much, as the recent sale of Musk's Tesla shares illustrate - even trying to cash out affects share price! So we are told that a company that is
just starting to ship cars hasn't sold a single car is worth more than Ford, even though it never has made a profit. What's more, it's selling a sedan in an era of SUVs. The car made Motor Trend's "Car of the Year" award, supposedly, but you know how I feel about those car mag awards (I wonder how much that cost?). The company "went public" though a SPAC which means none of the finances were scrutinized by the SEC (or the investors) before going forward.
I mean, other than that, it sounds like a good deal, right?
The problem is, of course, that people are speculating - wildly - on stocks these days. And these crazy Market Cap valuations are saying one thing to me - and very loudly - that we are on the cusp of a huge-ass bubble.
Now granted, Ford Motor Company, with its storied 100+ year history, worldwide collection of factories, parts makers, research centers, as well as a huge established dealer network, could all go away in a heartbeat. We saw GM go bankrupt, and Chrysler go bankrupt - twice. Hell, Chrysler doesn't technically exist anymore - now part of "Stellantis" (Fiat) after sleeping with Mercedes, Mitsubishi, and Renault (via AMC) in the past. So yea, it is possible that Ford might be left behind in this new EV era, and these new companies - Tesla, Rivian, Lucid, Nikola (well, not Nikola) might replace them.
It is possible. But as Tesla is learning, having an installed base of dealers, a parts network and so on and so forth, is sort of essential in creating an overall system of transportation. Cars do not exist in a vacuum - they require a network of roads, fueling (charging) stations, parts supply, mechanics, and so on and so forth. It's a transportation system, not just a car. Tesla has been out ahead in installing charging stations (we have dozens here on our island, for Tesla and "other"). But even Tesla has fallen down a bit on the after-market service.
The major automakers are not sitting on their hands either - almost every automaker is pouring Billions of dollars into EV technology. Ford just pledged $11 Billion into a new EV F150 plant and a battery plant in Kentucky. Meanwhile, Lucid crows about having $488 million on hand. See you and raise you $10.5 Billion.
Like with the railroad glut of the late 1800's, I suspect we may see an EV glut in the coming years, as there is a shakeout in the auto industry. Worldwide, auto production capacity has exceeded demand by over 100% for decades, which is why, in part, GM went bankrupt and later abandoned its European holdings, and why Chrysler is part of Fiat/Stellantis now. So far, Ford has gone it alone, which may be why its stock is so undervalued.
Yes, undervalued, with a P/E ratio of about 28, rising from as little as 11 earlier in the year (!!). Lucid? Losing about 50 cents a share so far. They have to sell a lot of cars in a hurry to make things turn around. And quite frankly, I think the Tesla Model S has the luxury end of the EV market sewn up right now. In fact, that part of the market might be saturated. Meanwhile, Tesla's SUV - which turned into a gull-winged disaster - illustrated that there is a demand for such vehicles and people are willing to endure a lot of crap to get one.
Which may be why Ford is selling the EV "Mustang" which is actually an SUV and apparently quite well made (compared to the Tesla Model X, anyway). The point is, there is no "secret sauce" or as Warren Buffet likes to call it, a "moat" around EV production. GM is going all-in on the EV Cadillac, forcing dealers to retool or retrain to sell EVs - or get out. The market, which Tesla pretty much had to itself for many years, will soon by overflowing with EVs of various sorts.
Who will win, who will lose? Hard to say, of course. I am not in the prediction business since my time machine broke down. It is possible - but not likely - that all of these startup companies will prosper and displace the old-line carmakers. I suspect the reality will be that a few of them will succeed and one or more of the major car makers (worldwide) will fade away or merge with competition (as has been the trend before EVs came about). The advantage GM, Ford, Stellantis, Toyota, Mercedes, BMW, etc. have is established factories, established Engineering staff, experience with making and selling vehicles, huge dealer networks, networks of parts suppliers and so on.
One critique of Tesla products is that while the electronics part is keen, the "car part" is sort of being done on the fly. Things that are bread-and-butter to Toyota and GM, like fit-and-finish issues, as well as crash repair parts, warranty claims, and so forth, are all newbie problems to Tesla. The interior of even the Model S pales in comparison to that of even an Audi. And maybe early on, people would put up with that, to have the "latest and greatest" vehicle.
Like I said, a few years ago, down in Winter Park, Florida, I walked by some tony restaurant that had valet parking. Behind the velvet rope were parked a Bugatti, a high-end Porsche, and a Tesla. Back then, it was an exotic. Today, well, the Tesla would likely be parked around back. Times have changed, and having an EV is no longer seen as a status symbol. So I question Lucid getting into the "luxury" end of EV motoring, just at the point where Tesla has gone mid-market with its Model 3.
But like I said, there is an upside to crazy Market Cap valuations - they may be a sign that something is going on - something bad. Maybe this Lucid company can jump into the fray and sell more cars than FoMoCo within a year or so - at a higher profit level as well. And the supply of buyers for such vehicles will be endless and the market will not be saturated. Or... maybe people are getting ahead of themselves here and the "retail" investor, reading about EVs online and wanting to jump on "The Next Big Thing!" is paying more than they should be, for stock in a company that hasn't shipped any cars yet or even built a factory to make them. In fact, it seems all they have done is build prototypes and raise money - much like Elio and Nikola.
But the market cap! They have all this money! They are worth so much! No. Again, market cap is meaningless and doesn't represent any real wealth. There is no billions, just the under half-billion they have on hand, and some assets. Market cap is a mythical number based on the number of shares times the price the last chump paid in. They don't have billions to spend or invest. And quite frankly, I am not sure that a half-billion on hand is enough to roll out a new EV. But, we'll see.
All I know is, I'm not gambling my future and my wealth on possibilities and what-ifs and long shot bets. Because that is all it is - gambling. And when you hear the media hyping "Market Cap" at best you are being click-baited. At worst, you are being pumped-and-dumped.
When the marketplace turns into a casino, well, all bets are off!