In the past year the electric vehicle (EV) industry has been one of the best performers. Since February 2020, the S&P 500 is up about 17%, while the KraneShares Electric Vehicle and Mobility ETF (KARS) is up 90%.
There are many reasons for the outperformance of this industry, which we will cover in this report, but the underlying catalyst is that EV sales are expected to sharply increase over the next decade and eventually overtake gas-powered cars as the dominant form of transportation.
This continues a trend that started last decade. According to the IEA, there were less than 100,000 EVs on the road around the world in 2010. In 2019, there were around 7 million EVs on the road and by 2030, they forecast that there will be close to 100 million.
A New Industry
This type of growth means there will be tremendous opportunities for companies in the EV market, which is why we’ve seen EV leaders like Tesla (TSLA) and NIO (NIO) soar. And we are now seeing many legacy auto companies position themselves for this new reality, such as General Motors (GM) and Ford (F).
Even tech companies are getting in on the game, as Apple (AAPL) is reportedly looking to launch its own autonomous, EV in the coming years. Baidu (BIDU) has partnered with Geely (GELYY) to do the same.
In addition to legacy car companies and deep-pocketed tech companies, several startups are attempting to compete as well, such as Fisker (FSR) and Nikola (NKLA). Many of these companies’ stock prices have surged recently, even without showing any meaningful revenue.
Accelerating EV Adoption
According to Bloomberg, 1.7 million EVs were sold in 2020, and it projects that 26 million will be sold in 2030. The major impetus behind this growth is the falling costs and improving performance of these cars.
Already, many EVs are faster and more efficient than cars with internal combustion engines. Additionally, the EV ranges are continually improving. Currently, most EVs have a 200-mile range which is enough for 80% of households.
However, there remain some challenges such as a limited amount of charging stations, cold weather adversely impacting battery performance, and the amount of time it takes to charge EV batteries.
However, like any new technology, these challenges are steadily being overcome. The next-generation of EVs are expected to have 400-mile ranges. Charging stations are being rapidly built to meet this demand. Additionally, battery technology is being improved to increase charging times.
Due to these improvements, EVs are expected to reach a “crossover point” within the next 5 years, at which point they will be cheaper with more power and range than gas-powered vehicles.
Additionally, as production increases, costs will further decline on a per-unit basis due to economies of scale and network effects. EVs will eventually be cheaper to produce than gas-powered vehicles with the most expensive component being batteries. battery costs are also declining at a precipitous rate, and they will retain some residual value even after the car stops working.
Another reason that EV costs will decline further is more supportive policy from the government. In the US, President Joe Biden campaigned on a $2 trillion climate plan to boost clean energy, which includes support for the EV industry. He has already said that new government vehicles will be EVs, rather than gas-powered vehicles.
Some of the other possible items in his proposal are increased tax rebates, improving fuel economy standards, a cash for clunkers program targeted towards EVs, and significant investments in charging infrastructure. Biden’s plan includes $10 billion to invest in battery research and development
These efforts will increase demand and incentivize the production of more EVs. According to Morgan Stanley, if these policies are enacted it could result in an additional 7 million more EVs being on the road in 2025 than expected.
Currently, China is the largest market for EVs in the world. In large part, this is a reflection of government policy which is looking to reduce emissions to improve the environment. As a result, the Chinese government has offered a variety of incentives including rebates, tax credits, and quicker approval times for vehicle registration.
On the supply side, the Chinese government has directly invested in several EV companies and made low-interest loans to others. Also, the government sees having domestic EV makers as being important for strategic reasons, including employment. It’s also created standards for manufacturing and production of batteries that ensure they are swappable between different cars. This reduces any wasted investment if a company goes under. The government is also investing significant sums in charging infrastructure.
These efforts have yielded some success. NIO (NIO), Xpeng (XPEV), and Li Auto (LI) sales are growing and the companies have already attained multibillion-dollar valuations. They are even expected to start selling cars in foreign markets in the coming years. Their stocks are listed on US exchanges and have skyrocketed over the last year. While these are the early leaders, there are close to 500 EV startups in China that are still in the product-development phase.
For people who want to invest in the EV industry, the most straightforward way to participate in the industry’s growth is through buying stocks of companies making and selling EVs. However, a risk is that as the market matures, the competition will intensify, and some EV companies won’t survive. To avoid this risk, investors may choose to diversify with a broad EV ETF, like KraneShares Electric Vehicle and Mobility ETF (KARS) or the Global X Autonomous and Electric Vehicle ETF (DRIV).
Another option is to invest in companies that are helping to develop the requisite infrastructure for EVs, such as the charging station stocks. Similar to gas stations today, EVs will require a distributed network of charging stations. This will require a significant upfront investment, but it would pay dividends in the future as more EVs are on the road. However, a lack of charging infrastructure would stymie the industry’s growth. Some of the companies developing the technology for charging infrastructure are Blink Charging (BLNK) and Beam Global (BEEM).
An additional adjacent opportunity is to invest in companies focused on battery technology. Batteries are the heaviest and most expensive parts of EVs. Some EV makers are choosing to build their own batteries, such as Tesla (TSLA), while others companies are outsourcing to companies like QuantumScape (QS). While there’s less certainty about which EV company will emerge as the winner, demand for better batteries will certainly increase as the EV market grows.
Investing in battery companies presents the same type of challenges as investing in EVs. However, investors can be confident that the commodities used as inputs to manufacture batteries, such as lithium, nickel, and cobalt, will see increased demand regardless of which battery company performs the best. Some of the leading companies that mine these metals are: Albemarle (ALB), FMC (FMC), Rio Tinto (RIO), and Vale (VALE).
5 Electric Vehicle Stocks to Watch
Similar to AAPL, BIDU is another tech company that is looking to move into the EV industry. BIDU’s primary business is internet search and online marketing solutions in China.
BIDU has been using the proceeds from its search business to invest in other high-growth areas like cloud computing, AI, and autonomous vehicles (AV). While there was speculation that BIDU would license its self-driving software to other original equipment manufacturers (OEMs), BIDU instead is embarking on building its own vehicles through a partnership with Geely (GELYY), a Chinese multinational automotive company.
The joint venture will use BIDU’s autonomous driving software and design with Geely’s EV modular platform. It reduces the upfront cost of production for BIDU which has no experience in manufacturing. For Geely, it will see increased volumes, while BIDU will contribute capital for scaling production.
In pilot tests, BIDU’s self-driving vehicles had shown success in making trips without incidents and navigating road hazards. Investors were enthusiastic about this move by Baidu to take the next step in the commercialization of its AV technology as shares have climbed 35% in less than a month following the announcement.
The POWR Ratings are bullish on BIDU, as it is rated a B, which equates to a Buy. Even without the EV news, BIDU shares are attractive from a value and growth perspective given its leading position in internet search and growing cloud computing division. It’s also considered one of the leading AI companies in the world as well.
BIDU also has a Quality rating of B. This is consistent with the deep moat around its legacy search business. BIDU has 89% market share because it’s able to deliver the best results, since most people in China use its services. Thus, it has a monopoly due to network effects that can’t eastily be disrupted.
BIDU has a B rating for Momentum as well. This is not surprising given the stock’s recent performance. BIDU shares have broken out to a multi year high in recent weeks, following years of underperformance relative to other internet stocks. Given its continued success with internet search and strong growth potential with AI and AV, this breakout is likely to continue.
In total, the POWR Ratings system rates BIDU on 8 different levels. Beyond what we stated above, we also have given BIDU grades for Stability, Sentiment, Growth, Value, and Industry. Get all the BIDU ratings here.
General Motors (GM)
Recently, GM announced that it was accelerating its EV plan timeframe. It will launch 30 new EV models by 2025 and invest another $7 billion in EV and autonomous technology.
It puzzled many value investors that GM has a forward PE at 9.6, while it sells 2.8 million vehicles, while companies like NIO and TSLA have been so strong despite selling fewer cars.
One reason was the market was pessimistic about GM’s growth prospects. However, the company can likely see its multiples expand if it can win market share in EVs.
Another positive factor is that car sales in the second half of 2021 and 2022 are expected to be quite strong due to the combination of pent-up demand being unleashed, while interest rates are low, savings rates have been elevated due to the coronavirus, and employment should sharply increase as the economy returns to normal.
GM is rated a B by the POWR Ratings which equates to a Buy. GM has two powerful catalysts in the growth in auto sales and a chance to win market share in the big markets of the future like EVs and autonomous driving.
It also has a B for Value which is consistent with its low PS ratio of 0.7 and forward P/E. Analysts are also bullish on the stock as it has a consensus price target of $59 with the highest estimate being $80. Additionally, 12 out of 13 analysts have a Buy rating on the stock.
GM also has a B for Growth. Next year, EPS is expected to grow 30% with sales growth of 17%. The company can appeal to growth investors due to its exposure to EVs and autonomous driving especially since it’s cheaper than other EV stocks.
Note that GM is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
During the early parts of the EV rally, Ford and GM were underperformers as their business was more tied to the underlying economy which was affected by the pandemic. Now, their stocks have become market leaders as they increase their focus on EVs.
Ford is introducing EV versions of its most popular vehicles such as the F-150 and the Mustang. Both have received high grades from critics. Many of the EV stocks have sky-high multiples, while Ford has a PS ratio of 0.4. If Ford can win market share with its EV launch, then it would likely see some multiple expansion.
Additionally, its legacy auto business should do well in the latter half of 2021 as the economy normalizes which will unleash all types of spending including auto purchases.
The POWR Ratings rate Ford a B which equates to a Buy. Ford has strong value and growth characteristics given the improving economic environment and expected growth in EV sales.
Given its low PS ratio and a low forward PE of 8, it’s not surprising that Ford has an A for Value. Another indication of Ford’s value is that some see the stock as an attractive acquisition target for a larger company or an EV with a larger market cap like NIO or TSLA who could take advantage of the company’s existing facilities and expertise to scale production.
Ford also has a B for Growth. In 2021, analysts are projecting 35% earnings growth and a 20% average annually over the next five years. In addition to EVs, Ford is investing in self-driving technology as it’s bought several startups in that area. Another growth driver is strong economic growth in the latter half of 2021 and 2022 as the world recovers from the pandemic. Interest rates are low, and due to stimulus payments, household balance sheets are in good shape on an aggregate basis.
TSLA is currently the market leader in EVs. Last year, 2.1 million EVs were sold. Of this, TSLA sold 500,000, and it’s expecting to sell 50% more. TSLA is currently focused on increasing production.
TSLA is the fifth-most valuable company listed on the US exchanges. So, there are certainly some who believe the stock is overvalued given that the company hasn’t generated significant revenues or earnings yet. TSLA currently has a price to earnings (P/E) ratio of 1,352 and a price to sales ratio (P/S) of 25.5. These types of multiples indicate that TSLA will need to maintain its current growth rate for many years to justify this sky-high valuation.
The bulls believe that EVs will be a multi trillion-dollar industry and that TSLA is poised to become the “APPLE of EVs”. AAPL has earned a $2 trillion valuation due to its dominance in smartphones. As the leading EV company in terms of market share with 50% growth, TSLA has a chance to justify this valuation.
The company also is working on self-driving technology and batteries which are likely to become multi trillion dollar industries as well. Given its resources and Musk’s past successes, they can’t be counted out.
NIO is one of the best-performing stocks in the market and among EVs since this bull market started in March 2020. Over this period, the S&P 500 is up 78.9%, while NIO is up 28,374%.
There are a couple of drivers of this huge move – the company’s product has been a hit among Chinese consumers leading to waitlists for items, it received an injection of capital on favorable terms from the Chinese government when the stock price was near its lows, and already has grabbed a significant chunk of the EV pie in China which will rapidly grow in the coming years.
While the stock could have more upside in the near-term especially if the market’s bullish sentiment towards EVs remains intact, it is quite risky if the market and/or the EV sector did pull back. Further, NIO has a nearly $100 billion valuation, yet it still has to prove it can scale production and grow into this valuation.
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NIO shares were trading at $62.03 per share on Wednesday afternoon, down $0.81 (-1.29%). Year-to-date, NIO has gained 27.27%, versus a 4.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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