Stock take: Will the markets continue to back start-ups like Rivian?

The narrative driving stock prices for less established EV start-ups is essentially that they’re ‘the next Tesla’. But how valid are their claims?

Rivian is the EV maker that investors are betting most heavily will follow in Tesla’s footsteps. After a successful stock market flotation last November that raised about $13.5bn (£10.2bn), the Californian firm is now being promoted by financial analysts impressed by its successful roll-out of its first product, the R1T, last September.

“Rivian’s calibre as an organisation is made clear when considering it beat Tesla, Ford and GM to market with the industry’s first battery-electric pick-up truck (and an excellent one at that),” wrote analyst Ryan Brinkman for American investment bank JP Morgan in a research piece.

Rivian is cash-rich, capable and in possession of an order for 100,000 vans from retail giant Amazon, which is also a major shareholder. But it also has a mountain to climb as it follows Tesla’s lead to do much of the work itself – for example creating a network of chargers, rather than outsourcing.

Another analyst, George Gianarikas of investment bank Baird, started his coverage of Rivian’s stock by saying that this ‘vertical integration’ approach needs big sales to succeed and called on its founder and CEO to move fast.

“Clark Kent needs to emerge from the phone booth as Superman soon to scale Rivian and save the planet,” he wrote of bespectacled RJ Scaringe.

Rivian said in its stock prospectus published last October that it wants to move to enter Europe “in the near term”, followed by Asia, and to “localise production and supply chains in those regions”.

So far, though, its planned products are the 5537mm- long R1T pick-up, its 5131mm- long R1S SUV sibling and a van. Only the van would be likely to achieve anything other than niche status in Europe.

Rivian admitted this in its prospectus, saying that “initially and for the foreseeable future, we will depend on revenue generated from a limited number of models” and that “historically, automobile customers have come to expect a variety of vehicle models”.

Tesla also depends on a limited number of models, but at least the Model 3 saloon and Model Y crossover belong to market segments with global, rather than mainly US, appeal.

Lucid has more directly followed Tesla by launching with its Air luxury saloon first, but its valuation (reckoning it to be worth more than Ford, BMW, Ferrari and Stellantis) is looking shaky after it confirmed on 6 December that the American stock exchange regulator, the SEC, was investigating how it went public via a spac (special- purpose acquisition company).

The role of spacs is increasingly coming under scrutiny in the US, given how the listing process is far less rigorous than that of the traditional IPO (initial public offering), potentially allowing fraudulent claims and downplaying risks.

The spac process allowed the likes of Arrival, Canoo, Faraday Future, Lordstown and many others to jump from the fringes of the automotive industry into the consciousness of American investors looking for the next Tesla in one of the frothiest stock markets in history.

However, the disparity between revenue generated and market valuation has also caused many to bet against the start-ups using so-callled short-selling methods.

Short-sellers dug into some of the spac claims and found them wanting.

The various tricks of Trevor Milton, the former CEO of American start-up Nikola, were exposed by short-seller Hindenburg Research in 2020. Now the company is facing a $125m (£94.4m) fine from the SEC as it tries to move past the excesses of Milton. Its valuation of $3.8bn (£2.9bn) at the start of December was well down on its peak of $12.3bn (£9.3bn).

Other start-ups have also been targeted. Short-seller J Capital Research skewered two spacs for the price of one in the title of its report entitled ‘Move Over Lordstown: There’s a New EV Scam in Town’, which predicted that Faraday Future would never sell a single vehicle.

“Same nonsense, nothing more than a rehash of old news,” countered Faraday Future founder Yeuting Jia on Chinese social media.

Previously, Hindenburg Research had gone after Lordstown for misleading investors by falsely claiming customer reservations for its electric pick-up truck.

Lordstown CEO Steve Burns resigned last April amid the accusations.

Looming large over everyone’s claims are those of the traditional car makers, themselves betting billions on the shift to electric. But given the start-ups’ access to stock-market cash, their lack of ‘legacy’ factories and structures and their ability to be nimble could yet enable the best to follow Tesla and become household names in the future.