Electric vehicles have finally reached a tipping point as sales begin to make up a meaningful proportion of total vehicles sales. This has resulted in growing interest in EV stocks beyond the flagbearer, which is of course Tesla.
In this post we will primarily cover the 10 most valuable “pureplay” EV stocks. We will also briefly cover the legacy auto companies manufacturing electronic vehicles, and other companies within the ecosystem.
- Electronic vehicle industry
- Battery powered vs. hydrogen powered EVs
- Pureplay electric vehicle makers
- Legacy auto manufacturers
- Batteries and charging
- Ancillary suppliers
- Pros of investing in EV stocks
- Risk management with EV stocks
Electronic vehicle industry
Transportation is the greatest contributor to greenhouse gas emissions. Governments are therefore incentivizing the production of electric vehicles, which is providing tailwinds for the industry. This has resulted in large investments in the industry over the last decade, and sales are now reaching meaningful levels.
Electric vehicle sales around the world are currently growing at about 40% a year, but still account for only 5% of total vehicle sales. However, EVs are expected to reach 50% of total vehicle sales within a decade. China currently accounts for nearly 50% of EV sales, and the USA for 24%. EV sales are growing fastest in Europe.
There is little doubt that the electric vehicle market is going to grow considerably in the years to come. But that doesn’t mean you only to need to invest in specialist EV manufactures to benefit from this growth. There are four types of companies to consider when looking at the electric vehicles market:
- Electronic vehicle manufacturers that only produce EVs. The vehicles are powered either by batteries or by hydrogen fuel cells.
- Legacy auto companies that now manufacture electric vehicles.
- Companies that manufacture batteries or build and manage charging stations.
- Companies that produce materials, hardware and software used in electronic vehicles.
Battery powered vs. hydrogen powered EVs
There are two general approaches to providing electric power to the motors in electric vehicles. Manufacturers like Tesla have opted to use battery packs which need to be charged from an external power source. In terms of carbon emissions this approach is only as clean as the electricity used to charge the vehicle.
The other approach is to generate power on the vehicle using hydrogen fuel cells. This approach has greater energy efficiency and results in low-to-zero carbon emissions. The problem is the space required to store the hydrogen and the lack of infrastructure to refill hydrogen tanks. Most electronic vehicle makers opt to use batteries for passenger vehicles and fuel cells on trucks that have more space to store hydrogen.
Pureplay electric vehicle makers
These are the 10 most valuable EV stocks in the world. It’s worth bearing in mind that only two are profitable and five are pre-revenue.
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Tesla Inc. (Nasdaq: TSLA)
Tesla, and its visionary leader, Elon Musk need no introduction. The company dwarfs the entire EV market in most respects. In terms of market capitalization, at $596 billion, Tesla currently dwarfs the entire auto market. Teslas are not cheap. The cheapest model, the Tesla Model 3 sells for over $38,000, while expensive models like the Model S and the Model X SUV are priced as high as $122,000. The new Roadster which is yet to be released will be around $200,000.
Despite the high prices, Tesla’s sales are constrained more by its ability to keep up with demand, than the prices. Tesla has managed to build a very strong brand, across North America, China, and Europe. Sales have accelerated in recent years as the company builds out its capacity. The company is also more than just an automaker. In 2016 Tesla acquired Solar City, a solar energy generation and storage business. Musk expects this part of the business to eventually be as big as the auto business.
Despite Tesla’s growth, it remains a controversial stock – investors either love it or hate it. Tesla earns a large chunk of its revenue by selling regulatory credits to other automakers. Without this revenue stream the company would not be profitable, and even with it the profit margin is only 2%.
BYD Company Limited (US OTC Market: BYDDF)
BYD is often overlooked because it trades on the OTC market, yet it is actually the second most valuable EV maker, with a market capitalization of $87 billion. BYD is a vertically integrated Chinese EV maker. Besides electric busses, the company makes batteries and other components to sell to other electric vehicle makers. Warren Buffett’s Berkshire Hathaway invested in the company due to its competitive position as a battery manufacturer.
The company’s revenue is growing at a much slower pace than other EV makers. However, BYD is also trading at a comparatively low price to sales ratio of 4.5, compared to Tesla’s 19. BYD and Tesla have similar margins – gross margins of around 20% and profit margins of around 2.5%
NIO Inc. (NYSE: NIO)
With a market value of $63 billion, NIO is the third largest company in the electronic vehicles market. NIO, which is based in China, currently produces 3 SUV models and a coupe. In the next two years, four new models are scheduled to hit the market, including another SUV, a minivan and two sedans. The company has managed to ramp up production and is now producing about 85,000 vehicles a year.
NIO has demonstrated that it has a dynamic approach to business. For example, the company outsources manufacturing to JAC, a state owned auto maker. NIO also allows batteries to be leased, bought separately from the vehicle, and upgraded.
Unlike Tesla, NIO allows batteries to be replaced at recharging stations. Changing batteries is quicker than recharging them but requires more infrastructure. So far NIO has 131 battery swap stations in China. NIO has become a favorite amongst investors due to its dynamic approach to business, which has resulted in rapid revenue growth. However, the stock is expensive, trading on a price to sales ratio of 31.
Other pureplay electric vehicle makers
- Lucid Motors (NYSE: CCIV) – Lucid Motors is the latest in a series of EV stocks to become listed by merging with a SPAC. The merger with the Churchill Capital Corporation IV SPAC has been announced but not yet completed. Lucid Motors was founded in 2007 but only manufactured batteries during its early years. Its Lucid Air luxury sedan will have a price tag of $70,000. It is due to go into production later this year. The key differentiator is that the vehicle will supposedly have 517 miles of range on a single charge. This will mean the Lucid Air will have the longest driving range of an EV on the market. When the SPAC merger was first announced, the SPAC price reached $65, implying a post-merger value of $90 billion. The price has since declined to levels implying a value of about $40 billion.
- XPeng Inc. (NYSE: XPEV) – Xpeng is another Chinese EV maker. In 2018 the company began shipping its G3 SUV, and last year began selling its P7 Sedan too. The company is now producing around 6,000 vehicles a month and revenue is growing at about 220% a year. The company competes on price, selling vehicles that are comparable to competing models, but at substantially lower prices. Recently Xpeng began exporting to Norway where EV sales are growing fastest in Europe. While Xpeng is generating revenue, its gross margin is extremely low. The stock is trading on a price to sales ratio of 60 due to high growth expectations.
- LI Auto (Nasdaq: LI) – LI Auto, the fifth most valuable electric vehicle manufacturer, is backed by Chinese tech giant, ByteDance. LI Auto produces just one model, a plug-in hybrid electric vehicle (PHEV) with both a petrol engine and an electric motor. This gives the company a distinct advantage in areas with few charging stations. The LI One is a six-seat SUV with a 1.2-liter turbocharged engine in the front and electric motors at the back. The petrol engine is used to provide power to the electric motor, rather than to power the wheels. Like most hybrids the batteries are charged when the car is in motion and through regenerative braking. It can also be plugged in like any other EV and does not need petrol to run – but the petrol engine can be used to extend the range. So far around 32,000 of the LI Ones have been sold. With a market cap of $20 billion, Li is trading at 24 times sales.
- Nikola Corporation (Nasdaq: NKLA) – Nikola Motors listed on the Nasdaq when it merged with the VectoIQ SPAC in June last year. Nikola is developing various electronic vehicles, though most are still at the concept stage. The model that has attracted the most attention is the hydrogen fueled Nikola One truck. In 2018 Nikola released a video of its concept truck in motion on a stretch of road. In 2020 allegations were made that the vehicle was merely rolling down a hill. An SEC investigation was launched and the executive chairman and founder, Trevor Milton resigned. This was not the first allegation of dishonesty made against the company, and investors are treating the stock with caution. It’s currently valued at $7 billion. If the company can indeed begin delivering trucks in the next year, that valuation is probably low – but investors are understandably cautious.
- Fisker Inc. (NYSE: FSR) – Fisker is an American company designing electric cars. It is also another of the EV stocks that went public via a SPAC deal. The company has yet to deliver a vehicle but has 12,400 pre-orders to date. Henrik Fisker, the founder, has previously brought an EV to market in 2012. Fisker is unique in that it concentrates on designing EVs, but outsources manufacturing, distribution, and maintenance to other companies. So far there are three Fisker vehicles in development: a shuttle, a sports sedan, and the Fisker Ocean, an entry level sedan. Fisker is also developing its own solid-state batteries and other components for electronic vehicles.
- Lordstown Motors Corp. (Nasdaq: RIDE) – Lordstown Motors is just two years old and is based in Ohio, in a former General Motors assembly plant. GM is also an investor in the EV startup. Lordstown is developing an electric pickup truck by building on the existing design of a similar vehicle developed by Workhorse Group. The Endurance will be a 4-wheel drive vehicle with a separate motor for each wheel. Production is expected to begin later this year.
- Canoo Inc. (Nasdaq: GOEV) – California based Canoo was founded in 2017 and came to market via an EV SPAC merger which was completed in December 2020. Canoo is planning to build electric commercial vehicles like minivans and multi-purpose vehicles. Canoo is one of the more unorthodox EV companies and is attempting to reimagine vehicles in several ways. For a start, the vehicles will be driven “by wire” meaning there will be no steering rack. Drivers and passengers will also interact with the vehicles infotainment system via their smartphones. The vehicles are still at the concept stage and production is probably some time away. Nevertheless, the company has managed to command a $2.8 billion valuation.
Smaller EV stocks
There are several even smaller electric vehicle companies listed on US markets. Investors are particularly interested in Niu Technologies (NIU), Workhorse Group (WKHS) and Kandi (KNDI). These stocks, like the other pre-revenue companies should be treated as speculative.
Legacy auto manufacturers
Legacy automakers have all accepted that the internal combustion engine’s days are numbered. Most are investing heavily in electric vehicle technology or partnering with electronic vehicle makers. In terms of numbers, Volkswagen is the leader with 220,000 EVs sold in 2020. Next are GM, BMW, and Mercedes. When viewed as a percentage of the number of vehicles sold by each company, Fiat leads with 14%, followed by BMW, Porsche, Chrysler, and Volvo.
Toyota has been the world’s leading hybrid vehicle manufacturer since it first launched the Prius in 1997. However, when it comes to electric vehicles Toyota has fallen behind. It has launched several EVs in limited numbers over the years, but electric vehicles have not been a priority. The company has now announced plans to launch six electric vehicles in the next five years.
Interestingly, some of the automakers that have lagged in terms of total EV sales stood out with the number of EV deliveries in 2020. The Renault Zoe, the Nissan Leaf, and the Hyundai Kona, were amongst the top 10 selling EVs in 2020. So even the companies that have lagged are starting to sales picking up.
With the legacy automakers, electronic vehicles do not yet contribute enough to the bottom line to really contribute to growth. That will change when revenue from EVs make up more than 20 to 30% of revenue. Until then investors are likely to be more focused on the pureplay EV stocks.
Batteries and charging
The most challenging part of the electronic vehicle industry relates to energy generation, storage and charging. Companies like Tesla and BYD are vertically integrated and develop their own solutions. But other companies have chosen to specialize in solving problems related to power. These companies require less capital to operate – but can still realize significant value by solving problems for the industry:
- Plug Power Inc. (NASDAQ: PLUG) makes hydrogen fuel cells for commercial vehicles.
- Blink Charging Co. (Nasdaq: BLNK) owns and operates charging equipment and stations in the US.
- FuelCell Energy Inc. (NASDAQ: FCEL) manufactures fuel cell power plants.
- ChargePoint Holdings, Inc. (NYSE: CHPT) manages a network of independently owned EV charging stations. The company already has 114,000 charging stations in 14 countries.
There are three other types of companies closely tied to the EV industry:
Electronic vehicles are often also autonomous vehicles. It’s widely assumed that many of todays EV models will eventually be self-driving, and so they are developed with that in mind. The companies that create equipment and software used on AVs are therefore intricately linked to the fortunes of the EV market. These are three of the leading vehicle automation companies:
- Luminar Technologies, Inc. (Nasdaq: LAZR) makes software and sensors used in autonomous vehicles.
- Alphabet (Nasdaq: GOOG) owns Waymo a leading developer of software for AVs.
- Baidu Inc. (NASDAQ: BIDU), another of China’s tech giants, is the lead partner in the Apollo project, a JV developing systems for autonomous vehicles.
Semiconductors are essential components of electric vehicles. In fact, NIO’s CEO recently warned that a current chip shortage is going to lead to a production slowdown later this year. These are the leading EV semiconductors stocks:
- ON Semiconductor Corp (NASDAQ: ON)
- Nvidia (Nasdaq: NVDA)
- Xilinx, Inc. (NASDAQ: XLNX)
- NXP Semiconductors N.V. (NASDAQ: NXPI)
These companies produce other materials for the electric vehicle industry, primarily minerals like lithium that are used to make the battery of electric vehicles:
- Albemarle (NYSE: ALB)
- Livent Corporation (NYSE: LTHM)
- Sociedad Quimica y Minera de Chile (NYSE: SQM)
- Ganfeng Lithium (OTCMKTS:GNENF)
Pros of investing in EV stocks
EV stocks have several tailwinds that should support stock prices over the long term. The electric vehicles industry is one of the major investing megatrends of the current decade. It also ties into two other megatrends – renewable energy and automation. EV investors are set to benefit from policy changes over the next 20 years as governments work to reduce carbon emissions. Besides tax credits that give EV makers an advantage, cars with combustion engines are likely to be heavily taxed in the future.
The growing ESG investing trend on Wall Street means there will be no shortage of capital following to the sector either. For investors, the biggest challenge of investing in EV stocks is their stretched valuations. The majority of listed EV manufacturers have no revenue. Meanwhile those that do, have extremely low margins. Putting a value on an EV stock really amount to speculating. On the other hand, no one wants to miss out, so stocks tend to trade on very high valuations.
The other challenge is working out how pureplay EV companies will perform relative to the large industry players that are now pursuing the EV market aggressively. These companies have capital, resources, and distributions channels with which to compete. Pureplay EV stocks offer more upside but carry considerable risk.
Risk management with EV stocks
It’s important to remember that most EV stocks are highly speculative investments. In many cases, current valuations reflect best case scenarios. Yet, the reality is that manufacturing electronic vehicles poses considerable challenges. As is always the case with speculative investments, the only way to manage portfolio risk is by keeping initial positions small. Investments that turn out to be multibagger stocks will grow into large positions on their own.
As far as stock picking is concerned, the safer stocks often belong to the companies that supply the industry, rather than the EV makers themselves. In the case of electric vehicles, this includes the companies that make batteries and semiconductors, those that manage charging networks and those that supply raw materials like lithium.
Conclusion: Investing in EV stocks
The good news for investors is that the electronic vehicle industry is still young and there is a lot of growth ahead. Some of the best growth stocks of the next decade will no doubt belong to the industry. The challenge will be avoiding the temptation to chase prices too soon – there are bound to be several good opportunities to buy EV stocks in the future.