Bubble stocks under pressure; What is status on the EV battle?

The bubble stocks are mimicking the ARK Innovation ETF down 11% this year and indicated down again today hitting critical support levels. Bubble stocks have the ultimate duration profile (ultra-long) as their valuations are driven by cash flows far into the future, and since they are mainly equity financed the cost of capital (the discount rate on future cash flows) is driven by the cost of equity component. But with high valuations the implied equity risk premium is low and thus the marginal change in the risk-free rate dominates the marginal change in cost of capital.

Long-term bubble stocks are a bet on exponential technologies as Ark Invest’s founder and CEO Cathie Wood would, but short-term the main risk source is investor sentiment and the risk-free rate. Investors being aggressively are betting on low inflation to set in after the current spike in the inflation rate, and thus short-term the bubble stocks will be mirror image of interest rates. The worst-performing bubble stock this year has been C3.ai hit by insider selling and investors doubting the discounted growth rate.

Saxo's Bubble Stocks equity theme basket

Source: Bloomberg and Saxo Group

How quickly can Volkswagen catch up to Tesla?

Volkswagen has reported Q1 earnings today with revenue showing a 13% growth y/y but decline from Q4 2020. Cash flow generation and EBITDA margin look good, with Volkswagen generating €22bn in free cash flow over the past 12 months, but this figure will likely come down as the pandemic created a unique cost situation that will not repeat. The key metric for long-term investors was the 59,948 deliveries of EVs with 70% going to the European market. This number is 3x below Tesla’s 184,800 deliveries in Q1 and shows that Volkswagen is still a lot behind and the current chip shortage for carmakers is not making things easier as the CEO Diess told the press.