After being one of the best-performers in 2020, the electric vehicle (EV) industry added to these gains in 2021, although there was considerably more volatility. In 2021, the KraneShares Electric Vehicle and Mobility ETF (KARS) was up 22% which is slightly below the S&P 500’s YTD gain of 25%. In comparison, KARS had an 80% gain in 2020 vs the S&P 500’s gain of 16%.
However, 2022 does bring with it some EV industry headwinds. A major challenge will be the Fed’s hawkish pivot and the increase in short-term rates which leads to outflows in growth stocks.
Another challenge for the industry is supply chain issues with shortages of key components leading to production below capacity. Many companies will also have to reconfigure their production and assembly to account for increased EVs as well as develop new supply chains. Of course, it’s also possible that some new EV releases will fail to connect with the public and generate sufficient demand.
Still, there are many reasons for the industry’s outperformance and reasons to be bullish on its longer-term outlook. The major factor 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 2021, there were over 11 million EVs on the road. By 2030, it’s expected 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. These two companies are currently the leading EV companies, have a devoted and loyal following, and have already demonstrated the ability to produce and deliver thousands of cars every week.
Another development is that many legacy auto companies are positioning themselves for this new reality with the most notable examples being General Motors (GM) and Ford (F) who are investing heavily in EV production capacity and are unveiling an entirely new lineup over the next couple of years.
In addition to legacy car companies and deep-pocketed tech companies, several startups are attempting to compete as well, such as Rivian (RIVN), Lucid Motors (LCID), Lordstown Motors (RIDE), Fisker (FSR), and Nikola (NKLA). Many of these company’s stock prices are quite high despite these companies having no revenue and no immediate path to profitability.
For the most part, these companies are still mainly in the prototype phase, while a handful is spending to build their production facilities or partnering with other companies for manufacturing. This will certainly be challenging in an environment with inflation and supply chain constraints.
How they handle this expensive and complicated task will ultimately determine the fate of these companies.
Accelerating EV Adoption
According to Bloomberg, 5.6 million EVs were sold in 2020, and it projects that 30 million will be sold in 2030. The major impetus behind this growth is the falling cost and improving the performance of these cars. Other factors driving demand are rising gas prices and the improving performance of EVs.
Already, many EVs are faster and more efficient than cars with internal combustion engines (ICE). Additionally, 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 number 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 is 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.
One of the reasons that the EV stocks added to their gains in the early parts of 2021 was Democrats winning control of the Presidency, House of Representatives, and the Senate.
This raised hopes that President Biden would be able to pass the measures that he had campaigned upon like an expansion of the public charging network, increased subsidies for EV purchases, and tax credits for R&D. However, this has proven to be more difficult than anticipated given the tight margins in Congress which give inordinate power to more fiscally conservative members.
Thus, there was some money allocated for EVs in the infrastructure bill. $7.5 billion is allocated for EV charging infrastructure with another $5 billion allocated for the purchase of low and no-emission buses.
Another $65 billion is allocated towards clean energy generation. The bill also includes $110 billion to upgrade roads, bridges and other infrastructure which benefits all types of vehicles.
While the fate of the Build Back Better bill remains uncertain, it’s even more generous in terms of EV policy. Most notably, the bill includes an increase in the tax credit to $12,500 from $7,500. The subsidies are more generous for companies, manufacturing in the US, and with a union workforce.
There was some hope that the bill would be passed along with the infrastructure bill, these hopes have faded as Senator Joe Manchin remains opposed due to his concerns about inflation. There remains the possibility that a smaller version of the BBB bill could be passed in 2022 as negotiations in the Senate continue.
According to Morgan Stanley, the passage of the BBB bill would likely result in an additional 7 million EVs on the road by 2030.
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 the 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 batteries, such as Tesla (TSLA), while others 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
General Motors (GM)
Last year, GM announced that it was accelerating its EV plan timeframe. It will launch 30 new EV models by 2025 and invest $7 billion in EV and autonomous technology.
Within the EV industry, GM is almost like a value stock with its forward P/E of 8.3, and the car is expected to sell close to 3 million vehicles in 2021 with around 100,000 being EVs.
One reason for GM’s recent underperformance has been supply chain issues which have constrained production to about 65% of full capacity. However, the company believes that the worst of the crisis is over, and production should return to full capacity sometime by the end of 2022.
GM is rated a C by the POWR Ratings which equates to a Neutral rating. It’s not surprising that GM has a B for Value given its low P/S and P/E ratio especially compared to other EV stocks.
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 $74 with the highest estimate being $90. Additionally, 11 out of 13 analysts have a Buy rating on the stock.
F is making big waves in the EV industry with the Mustang Mach-E and electric F-150 garnering rave reviews and strong presales. F would also be one of the biggest beneficiaries of the BBB bill being passed given its unionized workforce and production in the US.
The company’s last earnings report showed that it’s doing well despite some of the challenges on the supply side which is preventing its factories from running at full capacity.
In Q3, Ford topped earnings and revenue expectations by a significant margin. The company also raised its guidance for the second time. It also holds a meaningful stake in Rivian (RIVN) and has benefitted from its recent gains as well.
F is well-positioned as its legacy business is a cash-cow which it’s using to build its EV segment. This puts it in a better position especially as many EV startups are dependent on funding growth through debt or issuing equity which erodes EPS.
Given its attractive valuation including a low forward PE of 10.5, it’s not surprising that Ford has a B for Value.
Ford also has an A for Sentiment and a B for Quality. These factors are reflected in Wall Street’s assessment of the stock as 11 out of 15 analysts covering it has a Buy rating. For 2022, they also are forecasting earnings growth of 35% with a strong economy and increased production.
TSLA is currently the market leader in EVs. Last year, 2.8 million EVs were sold. Of this, TSLA sold 700,000, and it’s expecting to sell 40% more in 2022.
Another milestone for Tesla in 2021 was its new production facilities in Texas, Germany, and China continuing to scale production. It’s a notable accomplishment as TSLA struggled with this task for many years, even causing a 40% decline in the stock price at one point, and it’s expected to be the major challenge for the slew of competitors emerging.
While many argue that TSLA is overvalued given its more than $1 trillion market cap, it is the clear leader in EVs by a wide margin. Further, it has a dominant lead in autonomous driving given that its vehicles are already generating data and helping its neural network improve. Given its resources and CEO Elon Musk’s past successes, they can’t be counted out.
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 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 climbed 35% in less than a month following the announcement.
Since then, shares have given up all these gains and more. The primary reason is the Chinese government’s crackdown on tech companies due to concerns about market power and user privacy. While this remains a risk, it also could be an opportunity to pick up shares at a discount especially as BIDU’s core business remains profitable, and it offers exposure to a variety of growth categories including EVs.
The POWR Ratings rate BIDU a C which equates to a Neutral rating. The company has a B for Value which is consistent with its very low P/E.
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.
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 116%, while NIO is up more than 1,300%. However, the stock is down by more than 50% from its highs in February 2021.
There are a couple of drivers of this massive volatility. During the upswing, the company’s shares were bid up as many saw it as the ‘China of Tesla’ given that both companies’ products were popular due to their design and had visionary and charismatic CEOs at the helm. Therefore, many investors believe that the company will have a similar trajectory to TSLA.
However, this bullish euphoria has been interrupted for most of 2021. A major factor is certainly the move higher in short-term rates which leads to outflows in high-multiple, growth stocks like TSLA. Another factor is the aforementioned crackdown on Chinese businesses which has cooled sentiment among investors and led to a re-risking of all Chinese stocks.
These are salient risks that investors need to consider, however, the company is doing an exceptional job in terms of operations. It’s consistently increased production and is set to unveil new models in the coming years in a variety of categories and at different price ranges. It’s also likely that the Chinese government will continue to provide additional support for domestic EV companies like NIO.
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TSLA shares fell $1.97 (-0.18%) in after-hours trading Tuesday. Year-to-date, TSLA has gained 54.25%, versus a 29.25% 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. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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