After a whirlwind 2020 where electric vehicle (EV) stocks were on an absolute tear, the first five months of 2021 have seen investors book profits and take a breather. Further, Wall Street was also worried about rising inflation rates and steep valuations of growth stocks that contributed to this decline.

However, every market correction provides investors a chance to buy quality stocks at a lower multiple. Here, we look at two such companies in the EV space that should be on the buying radar of investors. One is a market leader in Tesla (TSLA - Get Rating) while the other is a far smaller company- Arrival (ARVL - Get Rating) which is looking to gain traction in the highly disruptive EV segment.

The shift towards clean energy solutions will be a key driver for EV manufacturers making them solid long-term bets. Let’s see which between Tesla and Arrival is the better EV stock right now.

Tesla is an EV heavyweight

Tesla is the largest EV manufacturer in the world. In Q1, it delivered 184,800 vehicles which was an increase of 110% year over year. The company increased production by 76% to 180,338 vehicle units. Tesla expects to increase vehicle deliveries by 50% year over year which means it will ship close to 800,000 units in 2021.

Its sales were up 74% year over year at $10.4 billion and it reported an adjusted net income of $1.05 billion as well as free cash flow of $300 million while reducing outstanding debt by $1 billion.

However, investors were not too enthused about Tesla’s Q1 results. The company generates a significant portion of its profits from the sale of regulatory credits. Further, its China-made vehicle deliveries fell 27% month-over-month to 25,845 units in April 2021.

The EV space is expected to heat up in the upcoming decade given that legacy manufacturers such as Ford (F) and Volkswagen as well as rising stars including NIO (NIO) and XPeng (XPENG) are trying to gain traction.

However, Tesla’s leadership position will make it easier to benefit from economies of scale going forward as it targets emerging economies in Asia, Latin America, and the Middle East. Tesla is building factories in China, Germany, and Texas, and according to multiple reports it has already received one million pre-orders for the much-awaited Cybertruck.

Tesla stock is valued at a market cap of $601 billion. Wall Street expects sales to rise by 55.7% to $49.1 billion in 2021 and by 33.9% to $65.74 billion in 2022. Its earnings are also forecast to grow from $2.24 in 2020 to $6.22 in 2022.

It means Tesla is trading at a forward price to sales multiple of 12.24x and a price to earnings multiple of 137x which is steep. However, growth stocks command a premium valuation and Wall Street has a 12-month average target price of $661 for Tesla stock which is 6% higher than its current trading price.

Arrival is trading below its IPO price

Arrival is a company that designs, develops, and sells EVs. It offers vans, buses, trucks, and other commercial EVs to customers in the U.S., Europe, Russia, and the U.K. The stock went public in March this year at a price of $22.8 per share while raising $600 million. Currently, the stock is trading at $20 which is 12% below its all-time high.

Arrival is backed by multiple investors that include auto giants such as Hyundai and Kia Motors. Another investor in Arrival is UPS (UPS) which has ordered 10,000 units with the option of adding another 10,000 to its order book. The orders are pegged at $1.2 billion.

Arrival recently partnered with Uber where the two companies aim to create an affordable ride-hailing EV. The Arrival car is expected to begin production in late 2023.

Arrival has estimated sales of $1 billion in 2022 and $5 billion in 2023. Its market cap of $12 billion suggests the stock is trading at a forward price to sales multiple of 12x.

The verdict

While Tesla is standing at the podium, Arrival is just revving up its engines. Tesla’s leadership position makes it a safer bet while Arrival may have the potential to derive outsized gains in the upcoming decade. However, for that to happen Arrival will have to consistently beat analyst forecasts consistently and deliver better than expected quarterly results.

Tesla is an established player with a strong brand name. The current pullback offers investors a buying opportunity given that the company is well poised to benefit from multiple tailwinds, making it a better bet right now.

TSLA shares were trading at $621.16 per share on Thursday morning, up $2.03 (+0.33%). Year-to-date, TSLA has declined -11.98%, versus a 12.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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