The rise of electric vehicle stocks was one of the leading investment stories in 2021. What’s in store for EV stocks in 2022?
Dominant EV manufacturer Tesla (NASDAQ: TSLA) gained 50% from an already lofty valuation as it smashed through production targets and established itself as a solidly profitable car maker with an industry-leading margin.
Newcomers Lucid (NASDAQ: LCID) and Rivian (NASDAQ: RIVN) made dramatic entrances. Lucid went public through a SPAC in July, starting trading at around $26 and closing out the year at close to $40 after soaring to over $55 in November. Rivian staged a high profile IPO On Nov. 28, starting trading at $78 and pushing over $170 before closing out the year over $103.
EV stocks got a huge amount of investor attention, but they also displayed a high degree of volatility and raised questions about their extreme valuations. Can these speculative darlings stabilize and generate sustained growth? Are investors buying the right stocks?
Let’s take a closer look.
What Are We Buying: The EV Landscape in 2022
Investors are clearly betting that electric vehicles are set to carve out a substantial and eventually dominant share of the car market. That may be true, but it’s well in the future. In the first half of 2021 eclectic vehicles made up only 7.2% of global car sales.
7.2% is not a huge percentage of sales, but a substantial increase from 2.6% in 2019 and 4.3% in 2020. Sales figures are clearly up by substantial margins.
The strongest EV sales growth is in China and in Europe, with the US lagging behind in both growth rate and sales numbers.
Investors are clearly betting that the EV market share will continue to increase. They may be right, but increased market share may not be enough to keep the stocks flying high.
EV Stocks in 2022: The Headwinds
Electric vehicles certainly have a huge future. The role that any given company will play in that future, and the extent to which investors can expect rewards for any particular company’s stock, is less certain.
Let’s look at some of the headwinds and constraints that companies will have to manage as the EV market evolves and emerges.
The growth of electric vehicles will depend heavily on pricing Many of the EVs currently on the market are expensive. Tesla’s Model Y starts at $53,990, the model S starts at $89,990, and the Model X starts at $99,990. The cheapest variant of the “low-cost” Model 3 is just under $40,000.
Other EV manufacturers are also targeting the high-end niche. Rivian’s R1T pickup starts at $ 74,075 and the Lucid Air sedan starts at $77,400.
By contrast, many base-level internal combustion sedans, like the Toyota Camry, Honda Accord, and Nissan Sentra, sell for well under $30,000. Toyota’s Prius hybrid starts at under $25,000.
The high prices of electric vehicles are a significant obstacle to sales growth, and any manufacturer that can bring a competitive model starting at under $30,000 to market will have a huge competitive advantage.
American investors often focus on US market share, but as the chart above reveals, the US market for EVs lags behind both China and the EU. Market leaders vary as well. Tesla dominates US EV sales, but had only 7% of Chinese EV sales in the second half of 2021, down from 9% in the first half. In Europe, Tesla has dropped behind VW in total EV sales volume.
Dominance in the US market is important, but it’s not enough to define a dominant EV manufacturer, especially with US EV sales lagging behind other markets.
The Big One: Valuations
A great company with a great future isn’t always a great investment. Sometimes that great future is already priced into the current value. Sometimes it’s priced in several times over. Price and value sometimes seem completely disconnected, but they have a way of coming back together.
Tesla, the best-established EV maker trading on US markets, has a $1 trillion market cap and trades at an astronomical 330x trailing earnings. For perspective, that puts Tesla’s current valuation at $400 billion more than Toyota, Volkswagen, Ford, and GM combined.
While global figures for 2021 are not yet available, in the US those four companies sold over 20 times as many cars as Telsa, which suggests that Tesla would have to multiply its sales by an enormous margin to justify its current valuation, let alone a higher one.
Of course, Tesla could still rise in value: it’s a massively trendy stock and its CEO has celebrity standing that contributes substantially to the Company’s profile. It’s still in the rarefied territory and seriously exposed in the event of a market downturn.
Companies like Lucid and Rivian are trading at even more extended valuations, with both companies pushing close to the $100 billion market cap mark over the course of the last year. That’s the same range as Ford and GM, even though the two EV companies have barely begun selling cars.
EV Stocks in 2022: The Options
Electric vehicles have a huge future and will make up an increasing portion of vehicle sales. That seems certain. That does not mean that every EV company is a great investment. Manufacturers will have to bring the price of their products down, achieve global market penetration, and live up to their valuations.
There is no single ideal EV investment. There are multiple options and all of them have risks, advantages, and disadvantages. You may choose a small number of them, spread a portion of your portfolio across the sector, or avoid the sector completely.
What choices do investors have, and what are the pros and cons of each?
Tesla has dominated the EV investment conversation from the start. The Company dominates US EV sales, and Elon Musk’s high profile and cult-like following have made TSLA one of the most-discussed and most-bought companies in the stock market.
That high profile can be an advantage. Money moving into EVs will move to Tesla first. Any positive news about EVs will benefit Tesla first. The Company is arguably overvalued but has been more overvalued, and could rise in value again.
That high profile also has disadvantages. Tesla attracts a great deal of attention, and that can work for or against the stock. Because it has attracted a disproportionate share of EV investment, its valuation is extraordinarily high, leaving it vulnerable on negative news or in a general market decline.
A celebrity CEO has advantages and disadvantages. Celebrities of all sorts have been known to crash and burn, and Elon Musk has not always been a model of stability. If he’s involved in a scandal Tesla could be affected.
While Tesla the Company has a brilliant future, the stock has to be seen as a speculative investment at current levels.
A host of dedicated EV companies are now trading publicly. Rivian and Lucid are the most visible, but there are many others: Nikola, Fisker, Canoo, Gores Guggenheim, Lordstown, and XOS among them. All of these are in the early stages of producing or designing electric vehicles. Some have yet to bring a product to market.
As with any industrial niche, we can expect substantial consolidation in the EV sector. Companies with strong technology but limited manufacturing capacity may become acquisition targets for larger, better funded companies. Some may simply fall by the wayside. Some may also emerge as significant competitors to the major producers.
While any of these companies could succeed, all remain in highly speculative territory. Unless you have detailed knowledge of EVs and are in a position to assess the products, technology, and financial condition of these companies, they have to be considered fringe investments.
The China Plays
China is the world’s largest car market and has the fastest EV penetration rate. That makes it a point of interest for EV investors. Chinese companies like NIO, BYD, Li Auto, Geely, and Kandi Technologies have strong advantages in the China market and have the capacity to bring affordable EVs to Western markets.
On the downside, Chinese companies listing on US markets face significant obstacles, as US disclosure and financial reporting regulations may conflict with Chinese laws. Shares of Chinese companies have fluctuated wildly in the last year as the Chinese government implements new and unpredictable regulations and policies. There’s also no assurance that the products will be well received in other major markets.
Chinese EV makers have broken through some of the constraints of the smaller US companies. Many are actually making and selling cars – NIO sold over 10,000 units in Sept. 2021 – and they are producing relatively affordable vehicles. An investment decision will rest largely on their fundamentals, on how comfortable you are with the uncertainties inherent in China investments, and on whether you believe that the cars will find viable export markets.
The Dark Horse: Volkswagen
Wait, this was meant to be an EV article, right? Yes, it still is. Volkswagen is emerging as a major EV maker that is still valued as a conventional vehicle company, a potential opportunity.
VW has made a major commitment to EVs. A recent series of acquisitions and investments kicked off a $34 billion plan to build battery plants and lock in relationships with environmentally acceptable and politically stable lithium suppliers. VW plans to introduce 70 EV models (including company brands like Porsche, Audi, Skoda, and SEAT) by the end of the decade. VW’s Modular Production Platform is well suited to the production of large numbers of budget-friendly vehicles.
Some analysts expect VW to be the world’s leading EV producer by 2025.
VW already sells more vehicles than Tesla in the European market, where EV adoption significantly leads the US. VW also has an established brand, the economy of scale, existing networks of suppliers and dealers, and a long history of manufacturing affordable vehicles. More important, Volkswagen’s US-traded ADRs trade at under 8x trailing earnings, a very reasonable valuation for a major EV manufacturer.
Volkswagen also faces potential problems. The Company’s reputation took a huge hit when VW was caught falsifying emissions test results in 2015. The company has ambitious plans and the manufacturing capacity to carry them out, but plans and predictions are not assurances. Tesla still has significant leads in battery development, software, and self-driving capacity, and VW will have catching up to do to achieve their goals.
Another way to invest in EVs is to invest in suppliers of critical components, materials, and charging networks. Companies that manufacture batteries or develop new battery technologies are common targets, as are lithium producers.
Battery producers seem like an obvious choice for indirect EV investors, but the picture is not as simple as it seems. Many of the leading producers of EV batteries, like Panasonic and LG Chemical, are diversified and EV batteries are only part of their product lines. Some EV makers will develop their own internal battery manufacturing capacity instead of relying on outside suppliers.
Companies like QuantumScape, which is developing potentially revolutionary solid state battery technology, or Romeo Power, which focuses on commercial vehicle batteries, have potential but remain speculative early-stage companies.
Charging network companies include Blink Charging, EVGo, ChargePoint, and Wallbox. Again, this is a new and congested sector and it’s not clear who will emerge as the dominant players, or whether charging networks developed by manufacturers will be the dominant suppliers of charging services.
The EV battery market is expected to show a compound annual growth rate of 25% over the next four years, drawing investor attention to lithium, a key component of current EV batteries. Companies like Albemarle, Livient, Lithium Americas, and Piedmont Lithium have drawn attention as indirect EV plays.
That attention has already pushed valuations in the sector to very high levels, and potential downsides remain. The potential constraint of lithium supply has driven extensive research into alternatives. The development of alternative battery technology could bring lithium producers down to more conventional valuations.
Will the Sector Stay Hot?
EV stocks were definitely trending in 2021. Investors who got in early saw admirable gains and attractive exit points. Trends may make a sector or a stock visible, but last year’s trend may not be this year’s ideal investment: trending status can easily push valuations to unsupportable levels, even for high-quality companies. Markets are under threat from rate increases and high valuations, and heavily hyped stocks are often vulnerable in a general decline.
Should you invest in EV stocks in 2022? That depends on your time horizon – EV’s are very much a future-oriented sector – and your risk tolerance. You’ll need to evaluate the current status, growth potential, and risks of any of these investment options, and make the decision that suits your needs!