It Isn’t Just Tesla’s Stock That Needs to Slow Down

Whatever your view on Tesla, pulling money out of the car industry right now makes sense.

Two years ago, the world’s top 10 auto makers by market value outside China were together worth about US$680 billion. Now they are valued at more than $2 trillion. Tesla has jumped from third place to an enormous lead, and this month electric-vehicle makers Rivian and Lucid replaced Honda and Ferrari in the ranking. Rivian’s stock has more than doubled since its initial public offering last Wednesday.

This extraordinary surge in market value, which the changes in the pecking order suggest is mainly related to EVs, is almost impossible to rationalize. The earnings potential of a mature industry can’t have tripled. It is possible that EVs will eventually be more profitable than gas-powered ones—Tesla’s 14.6% operating margin in the third quarter showed the potential—but three times as much is a wild stretch.

The more difficult question, one that generates more heat among investors than perhaps any other right now, is which companies are more overvalued. Is it Tesla, Rivian and Lucid, which will have to grow exponentially to live up to valuations that have nothing to do with their current sales? Or is it incumbent giants like Volkswagen and Toyota, which are in different ways struggling to come to terms with EVs

Like simple market-value comparisons—Tesla is now worth four Toyotas!—conventional valuation multiples flag the EV specialists as overvalued. Tesla stock trades at 127 times forward earnings compared with less than 10 for most traditional car makers. Having just started commercial production, Rivian and Lucid don’t even have meaningful financial numbers to compare their $100 billion-plus market values to—just business plans.

But looking further into the future, as today’s record-low real yields on safe assets encourage, it is also easy to see old-school manufacturers as overvalued. The likes of General Motors and Ford have announced eye-catching EV investments funded by their conventional-car profits, and investors have rewarded their boldness. Both stocks are close to decade highs. But they have yet to talk about the challenge of winding down their vast combustion-engine operations. As EVs take market share, a reckoning will begin that may make clearer to investors the costs associated with this technological transition for a heavily unionized industry.

Tesla’s valuation only really adds up if it hits its target production capacity of 20 million vehicles a year by 2030, and at very healthy margins. Elon Musk’s ambition is hubristic given the problems car makers have faced historically when they have approached even the 10 million mark—think of VW’s diesel scandal, Toyota’s unintended acceleration, the unraveling of the Renault-Nissan-Mitsubishi alliance.

Yet it isn’t unprecedented for a disrupter to take a disproportionate share of industry profits for a surprisingly long period, says Philippe Houchois, an analyst at Jefferies who rates Tesla a buy. Ford did so in the 1910s and Toyota in the 1970s. Both companies brought a new simplicity to making cars, as Tesla also wants to. Toyota’s edge in traditional mass-market auto manufacturing persists to this day in the form of industry-leading margins.

Passions run high in this debate, which time will settle only slowly. The one thing that seems clear now is that investors overall are far from adequately discounting the unusual level of uncertainty about what the car industry will look like in 2030. When the fog gets thick, speeding up with excitement isn’t the best response.

An original watercolour illustration for the cover of Harry Potter and the Philosopher’s Stone, 1997 — the first book in J.K. Rowling’s hit series—could sell for US$600,000 at a Sotheby’s auction this summer.

The illustration is headlining a June 26 sale in New York that will also feature big-ticket items from the collection of the late Dr. Rodney P. Swantko, a surgeon and collector from Indiana, including manuscripts by poet Edgar Allan Poe and Arthur Conan Doyle, author of the Sherlock Holmes books

The Harry Potter illustration, which introduced the young wizard character to the world, is expected to sell for between US$400,000 to US$600,000, which would make it the highest-priced item ever sold related to the Harry Potter world. This is the second time the illustration has been sold, however—it was on the auction block at Sotheby’s in London in 2001, where it achieved £85,750 (US$107,316).

The artist of the illustration, Thomas Taylor, was 23 years old at the time and a graduate student working at a children’s bookshop. According to Sotheby’s, Taylor took a “professional commission from an unknown author to visualise a unique wizarding world,” Sotheby’s said in a news release. He depicted Harry Potter boarding the train to Hogwarts on platform9 ¾ platform, and the illustration became the “universal image” of the Harry Potter series, Sotheby’s said.

“It is exciting to see the painting that marks the very start of my career, decades later and as bright as ever! It takes me back to the experience of reading Harry Potter for the first time—one of the first people in the world to do so—and the process of creating what is now an iconic image,” Taylor said in the release.

Meanwhile, to commemorate the 175th anniversary of Edgar Allan Poe’s For Annie , 1849, Sotheby’s recently reunited the autographed manuscript of the poem with the author’s home, Poe Cottage, in the Bronx.

The cottage is where the author lived with his wife, Virginia, and mother-in-law, Maria Clemm, from 1846 until he died in 1849. The manuscript, also from the Swantko collection, will remain at the home until it is offered at auction at Sotheby’s on June 26 with an estimate between US$400,000 and US$600,000.

The autographed manuscript will remain at Poe Cottage until it is offered at auction at Sotheby’s on June 26.
Matthew Borowick for Sotheby’s

Poe Cottage, preserved and overseen by the Bronx County Historical Society, is home to many of the author’s famous works, including Eureka , 1948, and Annabel Lee , 1927.

“To reunite the For Annie manuscript with the Poe Cottage nearly two centuries after it was first composed brought to life literary history for a truly special and unique occasion,” Richard Austin , Sotheby’s Global Head of Books & Manuscripts, said in a news release.

For Annie was one of Poe’s most important compositions, and was addressed to Nancy “Annie” L. Richmond, one of the several women Poe pursued after his wife Viriginia’s death from tuberculosis in 1847.

In a letter to Richmond herself, Poe proclaimed For Annie was his best work: “I think the lines For Annie much the best I have ever written.”

The poem was composed in 1849, only months before Poe’s death, Sotheby’s said in the piece, Poe highlights the romantic comfort he feels from a woman named Annie while simultaneously grappling with the darkness of death, with lines like “And the fever called ‘living’ is conquered at last.”

Poe Cottage, preserved and overseen by the Bronx County Historical Society, is home to many of the author’s famous works, including Eureka, 1948, and Annabel Lee,, 1927.
Matthew Borowick for Sotheby’s

In the margins of the manuscript are the original handwritten instructions by Nathaniel P. Willis, co-editor of the New York Home Journal, where Poe published other poems such as The Raven and submitted For Annie on April 20, 1849.

Willis added Poe’s name in the top right and instructions about printing and presenting the poem on the side. The poem was also published in the Boston Weekly that same month.

Another piece of literary history included in the Swantko sale could surpass US$1 million. Conan Doyle’s autographed manuscript of the Sherlock Holmes tale The Sign of Four , 1889, is estimated to achieve between US$800,000 and US$1.2 million.

It Isn’t Just Tesla’s Stock That Needs to Slow Down

Elon Musk boosters and sceptics alike might agree that the car industry’s value leaves little room.