Marc Cuniberti A few years back I talked to a fellow advisor who had made a hefty sum on the Tesla start-up.
Subsequently, he started buying other auto startup company stocks such as Fisker, Lordstown Motors, and Rivian.
I cautioned him to be very careful on investing in these other auto newbies. More accurately, I actually called him crazy for doing so. Even crazier were the people who bought these cars for the simple reason that if the car company goes under, so does the availability of any spare parts you might need along with the warranty.
You basically may have to throw your $75,000.00 car in the trash if it breaks.
Ouch.
My friend then drew my attention to Tesla and how much that stock had risen over the years. I had been an early investor in Tesla myself. Not that early mind you, as in my 50 or so years of investing, outside of Tesla, I had seen car startups come and go like the seasons. Hence I waited a long time before gambling on Tesla founder Elon Musk’s upstart company.
My advisor friend thought that how Tesla went, so would go these other new auto companies.
That made me think back to the Delorean fiasco, another upstart auto company that ended up imploding in scandal. Today, nary a Delorean can be seen, except in the movies. As a young and naïve investor, I was certain the Delorean would survive. Yet, like many auto startups before it, failed miserably.
My investor friend was adamant however that Fisker, Rivian, and Lordstown would all go the illustrious way of Tesla and make early investors filthy rich.
What my friend, who is three decades younger than me, did not possess, was the experience and knowledge I had watching and reading about car company start-up after start-up up subsequently all spending themselves into the fetal position of final bankruptcy.
Put simply, in economic terms, the cost of starting a business selling into a market where there already exists other suppliers is called “barriers of entry”.
Barriers to entry can include high startup costs, regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector, and in the auto industry, the barriers to entry are beyond massive.
It literally takes millions, if not billions, to bring a new auto company from conception to design to actually making automobiles and then selling them. It is the reason there have been, up until Tesla, only, for the most part, the BIG THREE American automakers and the decades-old familiar foreign names like Volkswagen, Mercedes, Toyota, and a handful of others.
Truth be told, it’s one of the eighth wonders of the world that Tesla actually survived. When its founder Elon Musk broke onto the scene with Tesla, I was certain that he would fail like so many car companies before him. In fact, Elon himself said one Christmas Eve in 2008, he was within hours of folding up both Tesla and Space X, his other start-up at the time.
Although at this time it appears Tesla is here to stay, bucking the trend of the many auto bankruptcies before it, the company has only survived less than two decades. A blip in iconic company survival periods. Only time will tell if Tesla survives.
That said, Tesla’s remarkable survival and meteoric rise in its stock price literally gave rise to others thinking they could do the same thing. Mainly start an auto company from scratch. They failed to notice, as did my advisor friend, that although Tesla did it, they are literally the ONLY one that did.
Whether it was from sheer luck and timing, or the brilliance of Elon Musk, it’s damn almost impossible to start a car company from scratch.
Case in point, Fisker is filing for bankruptcy. Lordstown Motors and Rivian may not be far behind. Rivian’s stock price is down by almost 90% to about 11 bucks and Lordstown Motors stock is a two-buck chuck.
In conclusion, I don’t cry for the investors in these companies. They took the bait, forgot history and common sense, and may lose all or part of their investment.
I DO however feel bad for the suckers who bought cars from any of these startups. Their groovy new car could end up as one very, very large paperweight.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
