To The Moon

Summary

• VinFast Auto became the number one car seller in Vietnam in just 2 years since its launch.

• VinFast surged into the limelight in mid-August, propelling itself to become the world's third most valuable automaker for a brief time period.

• While high valuations are not uncommon for emerging technology companies, VinFast's current valuation does not make a lot of sense.

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$VinFast Auto(VFS)$ , founded in 2017, is a Singapore-based automotive company that is part of Vingroup, one of the largest private conglomerates in Vietnam. VinFast Auto became the number one car seller in Vietnam in just 2 years since its launch and aims to be Vietnam's first global automaker. The company offers a 10-year or 125,000-mile warranty, over-the-air software updates, advanced highway driving assist, and a 15.6-inch infotainment screen. VinFast Auto also provides 90% EV charging station coverage and a unique AR/VR experience for its customers.

Since the company debuted on the Nasdaq on Aug. 15, its stock price has seen wild swings. The stock hit a high of over $90 in late August but is now trading hands around $30.

VinFast's rapid rise and market volatility

VinFast surged into the limelight in mid-August, propelling itself to become the world's third most valuable automaker for a brief time period within a mere two weeks of going public following its merger with special purpose acquisition company Black Spade Acquisition. This remarkable achievement not only surprised analysts but also served as an indicator of the automobile industry's changing landscape and the overwhelming influence of new technology.

The small number of outstanding shares (free float is just over 7 million shares) is one crucial element behind the stock’s wild swings. Because of the limited supply, market fluctuations have a greater impact, exacerbating the company's valuation swings.

Ownership and investments

A major aspect of the SPAC merger is that the Vietnamese startup's founder, Pham Nhat Vuong, retains a substantial 99% ownership stake. Pham Nhat Vuong is one of Vietnam's most affluent individuals with a $44 billion net worth who established Vingroup JSC, a conglomerate that started as a dried foods company and expanded into various sectors, including technology, industrial, real estate, retail, hospitality, healthcare, and education. According to a regulatory filing, Vingroup along with its affiliates and external lenders has invested $9.3 billion in the last six years to support VinFast's operational needs and capital requirements.

Financial performance and valuation

According to a Bloomberg report, none of the Nasdaq-listed companies with a market capitalization greater than $113 billion had revenues less than $12.7 billion in the previous year. VinFast, on the other hand, presents a contrasting scenario. The company sold approximately 24,000 vehicles in 2022, and generated revenue of around $634 million.

Despite notable accomplishments such as receiving 26,000 EV reservations, delivering 11,300 EVs in the first half of 2023, and delivering 20,000 e-scooters during the same period, the company reported a staggering net loss of nearly $600 million in the first quarter of the current year. Forecasts indicate that these losses are poised to accumulate as VinFast seeks to expand vehicle production.

Market challenges and opportunities

While VinFast is certainly a high-profile company in Vietnam's commercial environment, the long-term viability of the company’s market rally remains unclear when weighed against its current financial reality. The buzz around EVs with AI advancements continues to gain the attention of both seasoned investors and retail traders. While high valuations are not uncommon for emerging technology companies, VinFast's current valuation of around $68 billion on the back of revenue of around $633 million in 2022 makes the company one of the most expensively valued automotive companies in the world at a price-to-sales multiple of more than 100.

A significant shift in customer sentiment has emerged, with 51% of potential consumers considering the purchase of either new or used EVs, up from 38% in 2021. Even on the back of this enthusiasm, EVs are expected to account for less than 8% of total new vehicle sales in 2023 according to Cox Automotive projections. Despite incentives and rebates aimed at encouraging EV adoption, pricing remains a major barrier with 43% of potential buyers identifying cost as a deterring factor.

Future prospects and risks

According to a recent Reuters report, more than 90 new EV models are expected to be introduced by 2026. Experts warn, however, that many of these models may struggle to achieve lucrative sales levels. This finding is consistent with the current situation where U.S. dealers are struggling with overstocked EV inventories, which have tripled in a year, totaling more than 92,000 units. The wider implications of this changing scenario include a negative impact on profit margins, especially for companies that have yet to attain profitability. As the market grows with an increasing number of EVs and inventories, achieving the expected milestone of profitability becomes an even more challenging task for young companies that are still new to the sector.

VinFast may have a long runway for growth if everything goes according to plan. At the current valuation, however, investors do not have any margin of safety since the company is already valued more expensively than well-established auto giants with billions of dollars in free cash flow and earnings.

The company's expansion from e-scooters to electric cars will present new opportunities as well as challenges since the company will have to invest aggressively to boost manufacturing capacity.

Conclusion

VinFast's dramatic rise to become a global automotive force in a matter of weeks is an intriguing story driven by complex market dynamics. There are many challenges the company is facing today, including concerns regarding its financial sustainability, lack of clarity surrounding consumer preferences toward EVs, and the lack of regulatory support for EV buyers going forward. At VinFast's exaggerated valuation today, none of these risks seem to be accounted for. Investing in the company today will be a bet on market dynamics to push the stock price higher - not a decision backed by the fundamentals of the company.

Source: Gurufocus