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EV startups eyeing Tesla's success add competition to growing market

Tesla Inc. success is attracting other EV startups eyeing public markets in a trend that experts say will add new competitors to a growing market that includes legacy automakers.

EV sales for San Francisco-based Tesla reached new highs in 2020. Sales grew to 179,050 delivered cars in the first half of the year, from 158,200 deliveries in the same period in 2019. Tesla also recently replaced Toyota Motor Corp. as the most valuable automaker as Tesla's shares grew 274.9% year-to-date through July 21 to $1,568.36, giving the company a market capitalization of $290.73 billion, according to S&P Global Market Intelligence data.

Consensus estimates compiled by Market Intelligence call for Tesla to post an adjusted loss for the second quarter on July 22. But some still expect the company to continue a streak over three quarters of positive earnings and a rebound in China following the easing of coronavirus restrictions in the country.

Meanwhile, EV startups, including Michigan-based Rivian Automotive LLC, Phoenix-based Nikola Corp. and Los Angeles-based Fisker Inc., have investors' attention. The companies have raised a combined $7.05 billion in recent years and expect to launch new vehicles in 2021 and 2022. Experts say the companies are encouraged by Tesla's recent streak and see a bright future in the market that has shown strong growth potential in recent years.

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"The market is open to investing in these companies because the trend towards electric seems to be so powerful," Gary Silberg, Americas head of automotive for KPMG, said in an interview. "So I think there is an appetite from investors to take more risk and fund these new entrants."

The growing number of EV companies will add new competition not only for Tesla but also for companies like General Motors Co. and Ford Motor Co., which are also pumping billions into electrification. Global passenger EV sales hit 2.1 million in 2019 but will likely drop to 1.7 million in 2020 because of the pandemic, according to Bloomberg NEF's 2020 Electric Vehicle Outlook. In 2025, global EV sales could reach 8.5 million.

Tesla and Fisker did not respond to requests for comment by Market Intelligence. Rivian declined to comment, while a Nikola representative had no spokesperson available ahead of the deadline for this story.

Hoping for success

EV startups are hoping to emulate Tesla's success as its stock soars and sales grow despite the coronavirus pandemic, according to experts.

Rivian turned heads at the 2018 LA Auto Show when it revealed an electric pickup truck and electric SUV. The company has since raised over $5.35 billion in several funding rounds, including from Amazon.com Inc. and Ford. Rivian expects to begin delivering vehicles in 2021.

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Phoenix-based Nikola Corp. will reveal its Badger electric pickup truck in late 2020.
Photo credit: Nikola Corp.

Electric- and hydrogen-powered semi-truck maker Nikola began trading June 4 after a reverse merger with publicly traded special-purpose acquisition company VectoIQ Acquisition Corp. Shares in Nikola closed at $39.75 on July 21, up 17.8% since the company's trading debut, according to Market Intelligence. It plans to produce electric and hydrogen fuel cell trucks, both pickup and heavy-duty, in 2021.

Fisker is also planning to go public through a reverse merger with a special-purpose acquisition company in a $2.9 billion deal. The company is led by Henrik Fisker, who previously ran Fisker Automotive before Chinese buyers took over the company following a 2013 bankruptcy filing. The transaction will provide more than $1 billion of gross proceeds to the company to fund the development of an electric SUV planned for 2022.

"The emergence [of EV companies] is a combination of the technology costs coming down relative to five or 10 years ago and the huge success Tesla's stock has had," Morningstar analyst David Whiston said in an interview. That success, coupled with the easier path of going public through a reverse merger, as Nikola did, is attracting more entrants to the EV market, he added.

The "EV startup craze" also suggests that these companies "see a developing acceptance of EVs as a new part of life," said Bill Selesky, senior research analyst with Argus Research.

Shanghai-based EV startup NIO Ltd. has also seen shares jump on the New York Stock Exchange, up 220.4% year to date as of July 21, potentially signaling investor interest in such companies.

Eyes on Tesla

Despite several rocky years for Tesla that included major losses and missing sales targets, the electric-car maker has posted profits for the past three quarters and has outpaced its sales goals.

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While consensus estimates call for a quarterly loss, "Street numbers are all over the map," Wedbush analyst Dan Ives said in a July 20 research note.

Tesla has "executed flawlessly" in the quarter against the backdrop of the pandemic as the company reported 90,000 deliveries, beating Street expectations. Wedbush is calling for a profitable quarter, which could help support a case for Tesla's inclusion in the S&P 500, Ives said in the note.

Investors will focus on second-quarter profitability, the delivery trajectory in China and Model 3 demand outlook for the second half of 2020, Ives said.

Argus Research's Selesky also believes that Tesla will post a profit for the quarter with better-than-expected top-line growth, adding that he expects the automaker will talk about a strong rebound in China sales along with prospects for a new truck plant.

Competition

EV startups are entering a market that has players like Tesla but also traditional automakers focusing on electrification, which could lead to a shakeout in the market, experts said.

GM has turned electrification into part of its core business, with plans to invest more than $20 billion in electric and autonomous vehicles through 2025. GM plans to start production on its Cadillac Lyriq and GMC Hummer electric models in 2021, while Ford is investing $11 billion in electrification and an additional $500 million in Rivian. The automaker is working on electric versions of its F-150 pickup and the electric Mustang Mach-E SUV. Fiat Chrysler Automobiles NV is focusing more on hybrid models.

KPMG's Silberg said not every EV company can "win" in the market. Traditional automakers, especially, are grappling with how to run their existing business and be an EV company at the same time, he said. Internal combustion engine vehicles pay the bills, so automakers need to keep them, Silberg added, which can lead to a dilemma of trying to manage two businesses with different paces of change at once.

EV startups, on the other hand, can focus all of their resources on electric vehicles, he said.

In some cases, the automakers could cater to different consumers, Morningstar's Whiston said, adding that someone who wants Tesla's Cybertruck is a different pickup-truck buyer than someone who wants a pickup from GM, Ford or Fiat Chrysler.

"But for the most part, some legacy firms will lose share, and some startups will likely fail due to poor execution or the economy," Whiston said. Some of those startups could disappear or consolidate with other startups or traditional automakers, he said, adding, "It's too early to say who wins and loses," Whiston said.