The Vinfast Illusion
How did a start-up electric vehicle manufacturer based in Vietnam become the world’s third most valuable automaker?
Dear Reader, meet Vinfast Auto Ltd. Vinfast is an electric vehicle manufacturer headquartered in Hai Phong, Vietnam and listed on the Nasdaq stock market under the ticker VFS. The company is relatively new to the business, having sold only 18,700 electric vehicles and 105,000 vehicles total since it began to produce passenger vehicles in 2019. 1 Like any start-up business operating in a capital-intensive industry, Vinfast has consumed large amounts of capital, is not profitable and is unlikely to be profitable for some time. 2
Yet, as recently as late August, 3 the company had achieved a market capitalization of nearly $215 billion, making it the third-largest automaker in the world by that measure and almost as large as Porsche, Mercedes Benz and BMW combined. How was this possible? The answer lies partly in economics and partly in how the stock market works.
Stock prices, like the price of any freely traded good or service, are set by the intersection of supply and demand. However, only transactions occurring on the margin matter. In business, the highest marginal cost producer, providing the very last product to fully satisfy demand, sets the selling price for all other competing producers. 4 Similarly, in the stock market, it is the very last trade that prices all of the other shares.
In theory, if just one share of Apple traded for just one penny, that transaction would momentarily price all ~15 billion shares similarly and value the entire company at just ~$150 million. Does that mean that the entirety of Apple could be acquired for that sum? Of course not. That would be ludicrous. But the value of Apple, set by the marginal transaction at the intersection of supply and demand, was, for a brief moment, ~$150 million.
In the case of Vinfast, on that fateful day in late August, there were 3,428 shares, out of a grand total of 2.3 billion outstanding, that traded at $93.00 each. Most trades were for less than 100 shares and the largest was just 318 shares. In sum, just $318,804 changed hands between buyers and sellers in less than a minute to yield the aforementioned market capitalization in excess of $200 billion.
While the marginal transaction sets the price of all shares (or goods or services), the intersection of supply and demand determines the price at which this transaction happens. In the case of Vinfast, supply is quite restricted. Of the 2.3 billion shares outstanding, 99.7% are owned by the founder, Mr. Pham Nat Vuong, and do not trade. Just 7.2 million shares, 0.3% of the total, are freely floating and eligible to change hands on any given day. In actuality, far fewer do.
Demand is more difficult to pinpoint, but generally has two facets to understand. There is a social aspect – markets are, first and foremost, simply a collection of people and thus subject to the whims, fancies and foibles we humans are prone to. Usually, the wisdom of the crowd prevails, but sometimes only madness results. It was a social media site, after all, that sent GameStop “to the moon” back in early 2021.
There is a fundamental aspect to demand as well, with reason and self-interest helpfully counterbalancing the influence of emotion and popularity. Profit seekers are constantly at work in markets, carefully weighing the price of each stock against their estimate of its true worth and acting to bring those two figures into harmony. In the long run, such cooler heads always prevail. In the short run though, strange things can happen. 5
Everyone understands that there are profits to be made from buying stocks that later rise in price. However, there is also a way to profit by selling stocks that later fall in price. 6 Combined, these two forces help to determine stock prices. If one of the two is broken, or not of sufficient strength, stock prices can and do go awry.
This is precisely what happened at Vinfast. Short sellers, who seek to profit by selling shares they later expect to fall in price, were either unable to borrow shares to sell, faced too high a cost to borrow 7 or simply did not want to take the risk that social aspects of demand could push the stock even higher still.
As of this writing, Vinfast’s share price has fallen over 85%, though at $32 billion it is still the sixteenth largest automaker in the world by market capitalization. Whether that is appropriate or not is not the intent of this column, though I would certainly still advise caution. Others may reasonably disagree. Tesla was also once a money losing automaker selling 35,000 vehicles a year. It is now the world’s most valuable automaker by a factor of three. Only time will tell.
Sometimes though, all is not as it seems. Sometimes something too good to be true is just that. As long as the market is populated by imperfect human actors, unbelievable and seemingly irrational events can and will happen. Drawing on a little economic theory and understanding how the market prices stocks, hopefully you can better tell illusion from reality.
Thoughts? I would love to hear them. Email me at investmentinsights@zuckermaninvestmentgroup.com.
Written By Keith R. Schicker, CFA
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Through June 30th, 2023, according to the company’s September 2023 investor presentation. ↩
The source for these and other statements, except where noted, is the company’s most recent amendment to its registration statement. ↩
When I had first in intended to write about Vinfast. Alas, higher for longer was a greater priority for clients and readers at the time.↩
This is theoretically correct for commodity goods and services. Reality is much more complicated, but the underlying principle still holds.↩
I am deliberately not defining “long run” and “short run” here as the duration varies in every situation.↩
This is called short selling. In brief, you borrow shares from someone else, sell them and later buy them back, hopefully at a lower price, to return the shares to their original owner. Your profit per share is equal to the decline in the share price less the interest you paid to borrow the share.↩
I was told that the cost to borrow a share of Vinfast reached 400% at one point.↩