New Constructs CEO David Trainer joins Yahoo Finance Live to discuss the outlook of several notable companies who publicly debuted in 2021, particularly noting Rivian’s shares dive and the competitiveness of the EV space.
Video Transcript
– Welcome back to Yahoo Finance Live. It has, of course, been a banner year for a lot of IPOs out there as we’ve seen activity shoot up to a record when we’re talking about all of these companies going public, and there have been some high profile IPOs as well. And as much as there has been hype, some of those have not lived up to the hype, and I’m thinking about a few of them that our next guest has called out earlier on the year.
Some of his calls have proven true, some maybe not so much, but one that has was Robinhood. And I just want to play a bit before we introduce in the CEO of New Constructs, David Trainer, what he told us about Robinhood earlier this year. Take a listen.
DAVID TRAINER: This IPO is effectively selling investors on exploiting other investors. The whole payment for order flow business model is probably not going to be long for this world. It’s already illegal in the UK, and let’s face it. I mean, it’s a legalized form of front-running, so how long it remains legal is a big question. And payment for order flow is 80% plus of Robinhood’s revenue. So if they lose that, they lose a lot of revenue, and their business model effectively falls apart.
– That was David Trainer, then. This is David trainer, now, the CEO of New Constructs joining us, and David, looking back on a lot of these calls, that is the one that stood out to me. Because we were talking about valuation back then, IPOing around that $30 billion level. You were talking about it being $9 billion realistically when you dug into the numbers.
We’re now sitting at about a $15 billion valuation, so getting closer to where you were talking about. I mean, when you look back, obviously, a lot of hype. What do you see when you kind of revisit all the calls we had you talk about this year?
DAVID TRAINER: I think they’re proving true. You know, a lot of these businesses came out with really, really just overheated valuations. They really weren’t very well competitively positioned businesses, and you know, look, I mean, all the people in the business on Wall Street are incentivized to sell it at the highest price possible. So investors need to understand that that’s the attitude they bring to the table.
How much can I get you to pay for what I’m selling? And they’re going to put the number– they’re going to hike the number up as high as they can. And you just need to be measured and wait, you know? Look, if it’s a good business, it’s going to be around, but just let that IPO sticker price shock set in, wait, avoid it, and come back later if you still think it’s a good business. But the amount of hype around IPOs is really, really high, and that’s, I think, part of why an independent voice, like ours, can be really helpful.
– Yeah, David, we like to have you on, because you are always measured in a space that can often be hyped. I want to get your thoughts on the EV space, because we have seen some pretty incredible valuations, really hyped up IPOs too. We’re looking at Rivian today. Shares down on what we heard from the company in terms of them not being able to meet their production goals, and yet, this is a company, one of the few companies, we should say, that actually has a product on the market. So how do you think it stacks up against some of these other EV makers who have come to market with some of their rollouts being pushed back?
DAVID TRAINER: You know, it reminds me of the early days of the incumbent– I’m sorry. –the combustible engine industry, where you had a lot of players early on chasing after a new growing market. And most of them did not survive. They all had– a lot of them had really super high valuations just like they do now. There’s a lot of there’s a lot of competition.
There’s a lot of hyping. In general, you know, these IPOs, these upstart EVs, we’ve joked for a couple of months now about how Tesla’s valuation is 10 times higher than the cumulative valuation of all the incumbents. Now, you add these other IPOs, and it’s even more.
So if you’re buying in any of these, they’re all pretty much priced to, like, have 100% market share. So if you add all that up, they’re, like, at 300%, 400% market shares of the total EV passenger and truck market is what these valuations imply. So they make no sense, right?
Cumulatively, you’re stand alone, and I think what we’re really seeing– and it’s almost like the Robinhood thing, where you’re sort of praying. You’re praying on each other, right? There’s no way that any one of these individual companies can justify its valuation, if any of the other companies are successful, so every new IPO is just sort of placing more and more additional risk on the plate for anybody who’s in the EV space, any new EV IPO that is.
So yeah, again, look, I mean, you can wait. It’s a hyped up industry. You’re better off waiting to see how sort of the dust settles, and I also feel like assuming that the incumbents are going to all go to zero is probably a little aggressive.
– Yeah, I mean, that’s the thing, because I always– I’m in the same camp. And I learned that back in the Facebook IPO back when I was in college is just kind of this hype will die down. You can get in at a better price and maybe even what we saw floated in the IPO price, and that has often been the case for any of these. If you wait kind of three months, you might get a better deal than what was offered to some bigger firms out there in the initial public offering.
But when you look at maybe, I guess, that point on maybe being too pessimistic, and some of your calls on some fronts, I guess, crypto, we’ll use that as an example. Coinbase up above your estimate, although, it still has kind of underperformed from where it debuted. I mean, that’s a space that is quickly growing. So maybe you can make the case that, if crypto explodes, you could have multiple winners, whether it is Coinbase or Robinhood getting things right on the crypto front. I mean, how do you look at that in the longer term for some of these companies, and are there any in some of those exploding spaces you actually do like?
DAVID TRAINER: Yeah, no, you know, we rarely say that the value of the business is zero. I think, really, the only time I can remember saying that recently is with respect to Sweet Greens. I just don’t know if there’s a real business selling lettuce.
I think the EV space, it’s just so crowded, and you are– you know, we’re underestimating, which has historically been a big mistake in the market. We’re underestimating the operational and manufacturing capabilities of the incumbents. That has historically been a mistake, that people think that part’s easy, and it’s all about sort of the new thing.
That’s a mistake, and I think that the EV space, a lot of these businesses might go to zero. I don’t know which ones, but I think they’re going to– they’ve got a long way to fall. Coinbase, on the other hand, I think it’s a real business. I just think that their margins are extraordinarily high in this new space.
They’re already coming down, and no, Coinbase hasn’t fall as far as we’ve said. But it is way down from the IPO price, and we expect it’ll probably still fall. Again, they’re facing competition from some serious incumbents as well, you know, the Intercontinental Exchange, NASDAQ, London Stock Exchange. These guys, those firms have not been built by dummies.
They’re not just going to sit around and let someone else take over a brand new space. They’ve got an ability to get in there as well, and that’s going to put a cap on margins and growth. And we priced Coinbase in a place, where we think it sort of settles into a competitive niche in a broader marketplace, where there are other competitors. Pricing companies as if they don’t have competition is not smart business or investing, and we recommend you wait and see how the business is going to do before you buy it at a price that implies it has no competition.
– David, I want to see if I can push back on that incumbent argument, because that was the argument against Tesla. And you could say, whether we’re talking about crypto space, somebody, like Coinbase, or in the EV space, like a Tesla, there is a first mover advantage. And the reality is, when you think about the last year, those legacy plays, like a GM and Ford, simply haven’t caught up in the manufacturing, in the technology. Maybe it’ll come in 2022, but Tesla, at least, has proven that they can lead in this space. I mean, can’t you make the same argument for some of these other EV players who, yes, maybe don’t have the big scale that a GM does, but have been at this for maybe a bit longer?
DAVID TRAINER: I think that’s a very fair point. You know, first mover advantage matters. The key is how long does it last, right? Number one and number two with respect to manufacturing capabilities versus technology, I think, yeah, which one matters more? I’m not here to say. I’m just really here to say that they both matter, and you shouldn’t assume that the manufacturing advantage is going to be worth nothing.
You know, let’s start with Tesla, first mover advantage. It had a huge one. Market share was growing for a long time. Market share is no longer growing, and it’s not just GM and Ford. It’s Volkswagen taking market share like crazy in Europe.
I mean, they’ve got Tesla on the run there, and I think that’s the beginning of the incumbents really making a statement. And then it’s not just Volkswagen, and Ford, and GM. But it’s Mercedes. It’s BMW. It’s a lot of firms out there, Porsche.
They’re all making electric vehicles, and they’re making some really nice ones that compete with the high end cars that Tesla is making, which is where there’s more profit margin. And the only way to make money in the lower priced cars is to do it with scale, and that’s something Tesla has not proven they can do, despite all the technology. Meanwhile, GM, Ford, everyone else, you know, I assume they probably bought a few Teslas themselves. They’re reverse engineering what Tesla has done.
They’ve got their own cruise technology, which ranks much higher than Tesla in terms of assisted driving and full self-driving. Nobody’s at full self-driving we know, so yeah, first mover advantage matters. Not forever, and I don’t think Tesla has honestly been able to catch up fast enough on the manufacturing side to fully take advantage of their advantage on the technology side.
– Yeah, it’s been a wild year. I mean, as many IPOs as we’ve seen come out, and as much hype as there has been and down, as we showed that chart relative to the S&P overall, at least, one of the ETFs, it tracks some of the biggest ones there. Very fascinating. David trainer from New Constructs, I appreciate you coming back on. We’ll have much to look forward to you, I’m sure, and more IPOs coming down the pike next year. I appreciate the time.