The Auto Industry Is Likely To Grow In Units But Decline In Enterprise Value
According to ARK’s research, during the next five years the auto industry as measured in units will grow, but as measured by enterprise value, it will shrink. In 2021, the number of light vehicles sold globally was 78 million and the enterprise value of automakers, roughly $3.5 trillion. According to IHS Markit, during the next five years unit auto sales will increase at a 4.7% compound annual growth rate and hit a new high at 98 million units in 2026. ARK’s Non-Autonomous EV Base Case agrees with the consensus view that unit sales will increase by 20 million during the next five years but that the enterprise value of global automakers is likely to drop roughly 20% to ~$2.8 trillion. If autonomous taxi services were to emerge, as ARK’s research suggests will be the case, then vehicle unit sales are likely to drop 8% to 72 million, cutting the enterprise value of traditional automakers by more than 60% to $1.3 trillion, as shown below.
Historically, unit sales have been a good proxy for growth in the enterprise value of the global auto industry. After declining from 2017 to 2020, auto sales increased roughly 5% in 2021, as shown below, leading to optimism that the enterprise value of the global auto industry would revive and move back toward historical highs.
Now, we believe the auto industry is undergoing two profound shifts that are breaking the link between unit sales and enterprise value: a shift from the internal combustion engine to electric vehicles and, albeit early, a shift from human driven to autonomous vehicles. In 2021, the breakdown in auto sales by powertrain highlighted the challenges awaiting non-Chinese automakers with 85-95% of revenues in gas-powered vehicles. In 2021, while global vehicle sales did increase 5.1%, the 1.7% attributed to gas-powered vehicles accounted for only one-third of total growth, and the 112% attributed to electric vehicles for two-thirds, as shown below. In other words, the consumer preference shift toward electric vehicles has gathered momentum.
The consensus forecast for global unit sales in 2026 is ~100-million-unit sales, ~80 million gas-powered and ~20 million electric. Translated into growth rates, gas-powered cars will continue to grow at a ~1.7% compound annual rate and electric vehicles, 33%, through 2026. If these consensus forecasts prove correct, then the enterprise value of global automakers is likely to decline 20%, from $3.5 trillion today to $2.8 trillion in 2026, as shown below.
If ARK’s autonomous forecast proves correct, then total vehicles sales are likely to drop roughly 8% during the next five years, from ~78 million units in 2021 to ~72 million in 2026. Moreover, 44% of the 72 million are likely to be gas-powered, 26% electric, and 30% autonomous electric, as shown below.
As a result, the enterprise value attributable to automakers in 2026 would be $1.3 trillion, with autonomous electric automakers and electric vehicle automakers each accounting for ~$0.4 trillion and gas-powered automakers ~$0.5 trillion, as shown below.
If our assumptions for electric and autonomous electric vehicles are correct, then today’s $3.5 trillion in global automaker enterprise value seems to be discounting a much higher margin profile for the industry than it has achieved in years. In our view, the shifts to electric and autonomous are unlikely to create a rising tide that lifts all boats. Instead, the industry seems to be at risk as autonomous platform providers extract value at the expense of hardware manufacturers’ margins. If we are wrong and autonomous does not scale, the industry still seems overvalued based on the accelerated consumer preference shift toward electric vehicles at the expense of gas-powered vehicles.
The auto market illustrates why active portfolio management will be critical as innovation disrupts the traditional world order. Disruptors can camouflage the underperformance of traditional players and create value traps––stocks that are “cheap” for a reason.