Editor’s Note: This article is part of Joanna Makris’ Behind the Wall series, where she provides retail investors with the insider scoop on the hottest technologies and trends from today’s business leaders, industry experts and money managers. Today’s discussion is with Taylor Ogan, founder and CEO of hedge fund Snow Bull Capital.

Bitcoin (CCC:BTC-USD) hold my beer. There’s no hotter investment sector right now than electric vehicle (EV) stocks.

Hello, Tesla (NASDAQ:TSLA). The largest U.S. automaker by market capitalization is now worth more than $1 trillion. Plus, there’s a second Californian EV company to swoon over, Lucid Group (NASDAQ:LCID): shares of LCID are up more than 80% since October.

But it doesn’t stop there. Whether it’s the Leonardo DiCaprio-backed Polestar (NASDAQ:GGPI) or an all-electric Bugatti at Levere (NASDAQ:LVRA), things in the EV universe are getting steamy. And of course, there’s the mother of all initial public offerings (IPOs), electric truck maker Rivian Automotive (NASDAQ:RIVN), now valued at over $100 billion.

It has been a raging party for investors in EV stocks. Of course, ape wisdom tells us that stocks only go up, bro. But the question on many minds is simple: for how long? Can EV valuations keep on trucking, even if they don’t make sense?

Opinions are heated. So, to discuss EV valuations, competitive threats and investment opportunities, I went Behind the Wall with Taylor Ogan, founder and CEO of Boston-based hedge fund Snow Bull Capital. Here’s what happened.

How Much More Gas (or Electricity) is Left in the Tank? 

Since talking with Ogan in October, a lot has happened in the market– and for EV stocks. So, it’s important to put our conversation in context.

At the time, Tesla had just crossed the $1 trillion mark. Lucid’s market cap was around $40 billion. Today, it’s close to $80 billion. Meanwhile, Polestar — whose name still remains a subject of jest in investor circles — was still trading under $10. It’s now closer to $12.

And all of this happened before the Rivian IPO.  As I said before, it has been a raging party for EV investors. When it comes to EV valuations, Ogan rightfully points out, “It’s a rising tide lifts all boats kind of scenario.”

Momentum is a good thing, except when it isn’t. So, how long will EV stocks continue to go up? For many money managers, the party may be coming to an end.

One sign of a bubble is when stock valuations dissociate from their fundamentals. As Pershing Square Tontine’s (NYSE:PSTH) Bill Ackman recently noted, “We are in a classic bubble which has been driven by the Fed… Every indicator is flashing red.”

Investing in a ‘Rising Tide’

So with that flashing red warning in place, investors may want to start looking at the real fundamental catalysts that will sustain EV stocks over the next 12 months. The best place to start? Sector bellwether Tesla.

With competition looming on the horizon, the big question most investors are asking is whether TSLA stock has more upside from current levels. “There is no good way to value Tesla when you want to compare it to other automotive companies,” Ogan says.

One reason for the nosebleed valuations: EVs are one of the fastest growth markets to invest in right now. As Ogan points out, if you look at car stocks with more reasonable valuations like Ford (NYSE:F) and General Motors (NYSE:GM), “they’re not seriously pursuing EVs like some of these other companies that haven’t even delivered cars yet are.”

Exhibit A: Lucid Group, now worth $74 billion, has seen its stock almost double since our October conversation — without shipping vehicles in any meaningful volume. “It’s still high if you ask me,” Ogan says, “But again, rising tide lifts all boats. Tesla’s the tide.”

Opportunities and Threats 

Ogan continues to expect more upside to Tesla stock. So far, he has been right. A key catalyst for earnings growth, according to the hedge fund manager, is the company’s move to in-house battery manufacturing, “especially as they drop down into the lower-price vehicles.” That move could also see a significant expansion to Tesla’s bottom line. According to Ogan, “once we are able to see that, I think right there, that’s a 6% gain in gross margins on the automotive side [of the business].”

When it comes to competitive threats, Lucid and Rivian are clearly two new entrants who will no doubt take some piece of overall EV market share. Of the two, the fund manager expects Rivian to execute better because of its very different focus. “They’re also not going after the exact trajectory that Tesla went after, which is starting with a very high-end luxury sedan and then moving their way down. Rivian’s just going after a completely different market.”

That said, Ogan sees the biggest competitive threat coming not from these luxury upstarts but from mainstream Chinese EV competitors who are mass-producing EVs at a significant discount. “That’s where you’re starting to see the competition really undercut Tesla’s cars by at least $15,000 U.S. dollars and offer similar range, similar features.” The fund manager’s play here is Chinese battery maker BYD (OTCMKTS:BYDDF), which “makes more electric vehicles in China than Tesla does.” P.S. — Warren Buffett also owns a significant stake.

Finally, no conversation about EV stocks is complete without a discussion of lidar technology. Ogan has a soft spot for Luminar (NASDAQ:LAZR), which he thinks is best-positioned to ride the future of robotaxis and autonomous vehicles.

Read on, watch the video and share your take on EV stocks with me at jmakris@investorplace.com

Joanna Makris: So let’s get into it. Tesla has now hit over $1,000. Is there more gas in the stock here?

Taylor Ogan: There may be. I didn’t think it would get here this quickly. I did think that it would eventually cross the big $1 trillion mark. But [yes], I think that there may be gas left —  maybe electricity left [chuckles]… Yesterday [there was] a $90 billion in market cap move on a 100,000 order. If you look at the other 100,000 car order in the EV space, that’s with Amazon (NASDAQ:AMZN) and Rivian… Tesla’s move yesterday [has] already surpassed what Rivian’s market cap will likely be, around $80 billion.

So that may put it in perspective a bit. But I [also] think that for other reasons. They have two new factories coming online. They’re really ramping in China, which is in a growing market. They’re kind of maxing out in Fremont. But I think there is some gas left. I just don’t know in the next six months if we’re going to see a 200% move or anything like it’s done in the past two years. But no… I don’t think we’re anywhere close to the top in the next three to five years.

How do we think about valuation? If you try to value Tesla against a traditional carmaker, that’s a losing battle. A lot of people say that you can’t value [it] that way, it’s an ecosystem stock like Amazon. How should we think about what the stock is really worth?

There is no good way to value Tesla when you want to compare it to other automotive companies. But then when you want to compare it to some of the comps in the tech space — if you consider this a technology company — well, then everything’s a technology company these days and there also is not a good comp. So you really have to have an understanding of Tesla as an automaker [too]. I mean, a vast majority of its revenue comes from auto still and that’s not going to change in the next tw0, three, four, five years, if ever. It’s first and foremost an auto company… I like to look at really some of the parts because it is a company that encapsulates so many different businesses. And I’m not counting the robotaxi or even the Tesla bot or anything.

But seriously, the ESS energy storage — that’s a big chunk for Tesla. You also have maybe the ADAS [advanced driver assistance system] part, which is very different from robotaxi. That’s more value added. And then you have the core auto business. But even when you put that against the comps in the rest of the space, it doesn’t quite add up. And so I think that’s why a lot of investors do struggle with Tesla’s valuation. You may like the company, you may like the products, you may like the visionary behind it. But one of the things I struggle with is this valuation.

So now, once it surpasses $1 trillion, now I start looking at the trickle down with the other opportunities in the space. And there are a lot of them and a lot of them are just now really gearing up. So that’s more of the focus that we have… It’s a rising tide lifts all boats kind of scenario. And we’re seeing that just in the moves in the last week.

You hit on the fact that this is still largely a car company. I think 60% of sales are cars. What do you see as future levers for growth that could change our perception of Tesla’s valuation over time?

I think when Tesla comes out with new models — not models that they’ve announced and [are] waiting to really start production on like Cybertruck, Semi, Roadster, but these cheaper models. These models that are catered towards the Chinese market or the Indian market or the European market. A hot hatch, for example. That’s what I think is definitely in the pipe for Tesla. Maybe not in the next two years but certainly in the next five years, Tesla is going to realize that the competition finally is here and coming. And it’s going to need to compete on a model basis.

It’s done very well with its four core models. But now I think investors will be really excited with these new factories coming online that will hopefully crank out new cars. And I hope to see Tesla do battery production in house. Right now, they don’t and they’re missing some margin line there. But I think the model expansion will be bigger than anything. And probably the second biggest part will be the PV [photovoltaic] and ESS market for Tesla — not just in the United States, where it’s doing okay, but as it expands into some other areas.

Let’s talk about competition. A big part of the bear thesis on Tesla is that they enjoyed really early share gains but that it’s going to be all over now. You’ve got companies like, as you mentioned, Rivian. Clearly Lucid Group is one to watch, also commanding a pretty hefty valuation. How meaningful do you think the competition is right now? And how do you think about Tesla’s market share globally? They maybe have 20% of the global market. Where do you see that expanding or not over time?

In the United States, Tesla still has a commanding lead in the EV market and just the luxury car market. And I think that’s not going to change anytime soon. Of course, Lucid will creep into that as will Rivian. They’re kind of in different segments, though, at the same time.

The big market that we follow is the Chinese EV market. And that’s where you’re starting to see the competition really undercut Tesla’s cars by at least $15,000 U.S. dollars and offer similar range, similar features. What they lack in that is the brand value and certainly the supercharging network which is very key to Tesla. But the technology out of these cars, the battery technology is superior. The energy density of the packs — they’re already integrated into the actual chassis of the vehicle. Those are things that Tesla’s actually trying to do and is so far unsuccessful at. But these Chinese competitors, they really are delivering these products. You can go and buy one in China right now.

I think in the Chinese market as the NEV [neighborhood electric vehicle] space and BEV [battery electric vehicle] spaces [are] growing, Tesla’s market share — although it’s deliveries on a quarterly basis are growing — its market share is declining slightly. And that’s okay, as long as there aren’t others that are surpassing them in market share, which there may be soon.

So, no, I think that the competition really isn’t here yet. The valuation, I just as much struggle with with Lucid and Rivian. But there are some undervalued names in the space. They are just a lot of names that maybe people in the West haven’t heard of.

Let’s talk a little bit about battery tech. That’s a big coup for Lucid, obviously, with the 520 miles EPA-certified range. Do you feel like Tesla is behind in battery technology? Will they catch up with the tabless battery and their future plans?

Well, it’s important to note that neither company makes their own battery cells. At the pack level, they tinker with it quite a bit and tinker with the BMS and the inverter. That’s where Lucid has a lot of experience now with their Formula E division and everything.

But Tesla has also been at this for a very long time and its motor is incredibly efficient. And what it’s doing with Panasonic (OTCMKTS:PCRFY) cells — Panasonic’s newest cells, the 2170s that it’s been using in the Model 3 and Model Y. It’s still using the older 18650s in the Model S and X, but it’s still being able to crank out some real top performance. I mean, it’s the fastest production car in the market right now. So, clearly even with older… laptop battery cells is really what they are, they are still being able to get a lot of performance out of it. Now, when it comes to energy density at the pack level, that’s where Lucid seems to be superior. And that’s why Lucid has a 520-mile range car.

But the chemistry is also a concern of mine. These are [cobalt] based cathodes… Tesla is shifting towards nickel-based, but they’re cobalt-based… Obviously there are a lot of issues with cobalt, especially in the supply chain. But the rest of the industry is kind of moving towards these iron-phosphate LFP batteries. You’re seeing that all over China, they’re making a comeback. Granted, they’re not as energy dense. But they’re incredibly safe and they’re the cheapest on the market. So you’re also able to better make those structural versus cylindrical — it’s more difficult to assemble those into a pack and still have structural integrity.

So I think that Lucid and Tesla’s battery tech — it’s not really their battery tech, it’s more their pack tech — but they’re both real champions in the numbers that we’re seeing.

This is obviously a manufacturing business and margins are important. You hit on the fact that Chinese makers like Nio have fully outsourced manufacturing. Is there a concern that a company like Nio sets its foot in the U.S. market and that [it] could have profound implications for pricing and margins for Tesla?

I don’t see the Chinese brands coming over here in the near future. I think first will be Australia, New Zealand, parts of Europe. The U.S. is really a difficult country [and] market to tackle, especially with all the concerns geopolitically between China and the United States.

There is a stronger possibility that these Chinese EV brands will come out with new brands for the Western market. If you look at Nio (NYSE:NIO), for example, their vehicles with the Nomi — a little device in the front that has big hands and big eyes and talks to you as you drive — that’s a feature that’s catered for the Chinese market. In the U.S. that would be I think quite weird for a lot of people. So they will have to make maybe U.S.-specific cars as other automakers are making China-specific cars. So I don’t think that we’re going to see much impact to Tesla.

Tesla’s got a long future ahead in dominating the U.S. EV market. But the U.S. EV market is only so big.

What do you think about margins long-term for Tesla? Is this a 40% gross margin company? How do they get there? What are the levers?

I don’t see them getting there in the next five years… Especially as they drop down into the lower-price vehicles… The big jump that we’ll see is when they can do their batteries in house.

Once we are able to see that, I think right there, that’s a 6% gain in gross margins on the automotive side. And I think that we could see even more growth marginally with the new factories. Because if you look at the efficiency of Fremont, it’s quite terrible when you compare it to the Gigafactory 3 in Shanghai — it’s a brand new factory. And now [Tesla’s] coming online with two new factories that it learned everything from Gigafactory 3. So you have to imagine they’re going to be just as efficient if not more efficient. Once those really come online, then I see Tesla being able to really grow with its margin.

But I don’t really see it getting… I mean, it’s already extremely high in the automotive space. Again, as they creep down into lower SP, then of course it’ll be more difficult to maintain.

As you mentioned, these stocks have had big moves. Maybe there’s a little more juice left in Tesla stock. Where else would you recommend investors look? [What are the] names in the electric vehicle value chain that maybe have not had these kinds of moves that you’re liking right now?

My favorite name in the broader EV and battery space is BYD. A lot of American investors only know it by Warren Buffett owning just under 10% of the company but nothing more than that. It started out as a battery maker and now it makes more electric vehicles in China than Tesla does. So it’s doing very well.

I also see some plays in the lidar space, names like Luminar… That’s really, even just today, moving nicely on most likely news that Tesla may face some regulatory pressure with its full self-driving. So I see a lot of potential in the lidar space. You see robotaxis that are actually able to drive without a driver in the driver’s seat and they all use lidar. Whereas Tesla’s still struggling with its cameras from 2016. So I think that lidar is a big space [although] I don’t like all the names in it.

The battery space is really difficult to gauge when it comes to what you’re able to buy as a foreigner. Probably the best name in the space other than BYD is CATL, but you can’t buy that as an outsider. So there are a lot of opportunities that we may see move onto the Hong Kong Stock Exchange in the near future. [But] I’m not crazy about QuantumScape (NYSE:QS). I’m not really crazy about solid-state battery technology in general right now because we’re already seeing this resurgence of the iron phosphate battery. So I think it’s kind of a waiting game for directly into batteries. But I think that some of these new names — I want to see them deliver products before I really start taking a $43 billion valuation of Lucid, for example, seriously.

With that in mind, is there a way to play the EV space from a car perspective at a reasonable valuation right now?

No, I don’t think so. And you look at the companies that you may think are reasonably valued and they’re not EV players. The likes of Ford and GM, they’re not seriously pursuing EVs like some of these other companies that haven’t even delivered cars yet are.

It’s an awkward space right now. I think it’ll really even out a bit in the next three years. But for now… you can take the ride on Lucid and Rivian. Among those, even with the valuation, I prefer Rivian. I think that they are going to be able to execute better. They’re also not going after the exact trajectory that Tesla went after, which is starting with a very high-end luxury sedan and then moving their way down. Rivian’s just going after a completely different market.

So I think that’s more exciting. But still, I mean, I do again struggle with that valuation.

Yeah. [So] even for Lucid — a $40 billion valuation for a car maker that’s just now shipping in a luxury niche market. Is Lucid’s market worth a $40 billion evaluation?

Yeah — is it nosebleed high? You have to again look at the comps.

Investors should ask themselves what they would value Tesla stock at if it only had [the] Model S. And would they still have this established brand value and supercharging network and Elon Musk to add to that? Obviously not. But on Lucid’s end — definitely a more luxurious and more efficient sedan with similar performance — it’s still high if you ask me.

But again, rising tide lifts all boats. Tesla’s the tide.

Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.

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