One of the most exciting ways to build wealth in the stock market is to look for new technologies that have the potential to change the way people live. One such technology is quickly emerging, and changing how consumers travel: electric vehicles.
For some time now, the world’s smartest minds have been pointing to global warming as a global crisis and making a push toward clean energy. The Biden administration has signaled support for the shift away from the burning of fossil fuels and toward cleaner solutions, and although Congress remains divided, support for clean energy is as strong as ever.
With transportation being a major source of greenhouse gas emissions and leadership in Washington working toward a solution for the global crisis, all eyes have been on electric vehicles — both in terms of the benefit these vehicles have for the environment and the opportunities they’re creating on Wall Street.
What Are EV Stocks?
Electric vehicle stocks, or EV stocks, represent companies that operate within the growing EV market. While the clean transportation market is a relatively new one, there’s already an entire ecosystem surrounding it, with many moving parts creating a thriving industry.
As with companies in other sectors, EV companies come in a variety of shapes and sizes, making up multiple subcategories of the overall sector. Here are the various subcategories that make up the EV sector:
1. Traditional Automakers
Traditional car companies like General Motors (NYSE: GM), Ford (NYSE: F), and Volkswagen (OTCMKTS: VWAGY) make up the vast majority of the automobile industry. These companies, traditionally focused on internal combustion engines, have all changed their focus and made big promises in terms of an evolution to electric transportation options.
Ford recently announced the Mustang Mach E, a fully electric version of its iconic muscle car, and GM made a promise to go all electric by 2035. Volkswagen, the maker of the VW Beetle, is working on electric vehicles of its own.
The fact that traditional automakers are getting on board the EV train is a key point that investors should pay close attention to.
Companies with leadership positions in any industry are known to ebb and flow with the trends of that industry. Industry leaders stay on top by investing significant money in the technological innovation underlying those trends.
The investments by these large automakers suggests EVs are more than a passing fad. Leading traditional vehicle manufacturers aren’t going to leave money on the table. You can bet they’re getting in on the opportunity. Moreover, by investing in these vehicle behemoths, you’re investing in a long history of leadership.
2. Electric Automakers
While traditional manufacturers are one category to consider, there’s also quite a bit of opportunity in the up and comers with big dreams. Some companies — although they are relatively young in the century-old automobile industry — show significant potential as well.
When you think about electric cars, the first brand that comes to mind isn’t likely to be a traditional manufacturer. Instead, you’re likely thinking about Tesla (NASDAQ: TSLA), the electric vehicle maker led by Elon Musk, which acted as a pioneer in the EV industry years back and now holds a leadership position in the space.
However, Tesla isn’t the only company breaking into the auto industry without a traditional internal combustion engine. For example, Chinese manufacturers like Nio (NYSE: NIO), Xpeng (XPEV), and Li Auto (NASDAQ: LI) are all doing just that. Even Apple, the iconic maker of the iPhone, is venturing into electric autonomous vehicles of its own with the Apple Car project.
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3. Commercial Vehicle Manufacturers
While vehicles for consumer transportation are important and are a major source of greenhouse gas emissions in the developed world, commercial vehicles also need a bit of a facelift. According to Statista, medium- and heavy-duty trucks account for about 23% of all transportation-related greenhouse gas emissions.
The good news is that there are companies working to find a solution to this problem as well.
One such company is Workhorse Group (NASDAQ: WKHS), which is focused on the development of last-mile delivery vehicles.
However, electric engines have a way to go before they’ll be able to reliably power semitrucks for long distances. That’s why there are companies like Nikola (NASDAQ: NKLA), a Utah-based startup focused on the production of commercial semitrucks and pickup trucks that run on hydrogen fuel cell technology, which produces horsepower with the only byproduct being water.
4. Battery Manufacturers
EVs simply couldn’t work if there weren’t high efficiency batteries capable of providing the power they need for extended trips. As a result, there’s a booming market for companies that develop batteries for use in these vehicles.
One of the most popular of these is a startup known as QuantumScape. Opting to go public through a special purpose acquisition company (SPAC) acquisition rather than a traditional initial public offering (IPO), the company’s sole focus is the development, manufacture, and sale of lithium metal batteries designed for use in electric vehicles.
5. Charging Networks
Like any other reusable battery, the batteries in electric vehicles have to be charged. However, unlike with internal combustion engines, EVs don’t use an alternator to charge themselves. As a result, there’s a subsector of the industry that’s specifically dedicated to providing consumers with a way to charge their electric cars, trucks, and other vehicles.
There are two different types of businesses that center around EV charging. The first develops charging stations for these vehicles and sells them outright, generating revenue from the sale of their technology. The second is to develop a network of charging stations that charge vehicles on a metered basis, the way a traditional gas pump charges by the gallon, resulting in revenue every time someone plugs their vehicle into one of the stations.
One of these companies is known as Blink Charging (NASDAQ: BLNK), a Miami Beach-based company with more than 23,000 charging stations in its network.
What to Look For Before Buying an EV Stock
As with any sector, stocks in the EV category aren’t all created equal. Different companies will be in various stages of development and expansion, producing different valuation metrics and resulting in significantly different returns.
So what exactly should you be looking for when looking for the best stocks in the sector? Here are a few factors to consider:
Because the EV industry is emerging, many companies within it still aren’t profitable. There’s currently a massive amount of money being spent on innovation, infrastructure buildout, and market consolidation, cutting deeply into the profitability of many companies in the space.
However, there are a few companies that have already produced positive earnings and are expected to continue generating profits. Investing in companies that are already turning a profit reduces the risk of investing in a dud that’s destined for bankruptcy.
The EV market was born to solve a problem, and the incredible innovation taking place in the sector is doing just that. These vehicles are quickly becoming faster, enjoying longer battery life, and becoming inclusive of some of the world’s best entertainment and driver experience technologies.
When doing your research on a stock in this category, think about what makes the company different from an innovation standpoint and how that innovation will lead to potential market dominance in the future.
Building a company that produces top-notch EVs for the mass market is no cheap task. These companies spend tens of millions of dollars on infrastructure, design, prototypes, and more before ever making their first penny. In this young industry, there are precious few profitable companies that are generating free cash flow.
Before investing in a company that’s not yet profitable, it’s important to research the company’s books to get an understanding of whether the company is financially stable. Make sure the companies you invest in have enough cash on hand to get through at least the next year based on their cash burn rate.
If you invest in a company that runs out of money, a public offering of new shares could be the result, diluting the value of the shares you own.
No matter what kind of stock you’re considering investing in, valuation should always be a point of interest. The term refers to the actual value you’re getting for the price you’re paying when you buy a stock. A high valuation means you’ll get less for your money; low valuations represent discounts.
Investors use a wide range of metrics when determining the fair market value of a stock. Some of the most common include price-to-earnings ratio (P/E ratio), price-to-sales ratio (P/S ratio), and price-to-book-value ratio (P/B ratio).
Keep in mind that EV stocks are known for tremendously high valuations compared to both tech companies and traditional auto manufacturers, which have average P/E ratios of 42.44 and 7.68, respectively. Looking at Tesla, the leader in the EV space, you’ll notice something very different. Over the past five years, the stock has traded with an average P/E ratio around 918, with a low of 550.92 and a high of 1,401.73.
That’s extremely high, but experts point to the rapid growth these companies are expected to experience as a reason for the eye-popping valuations. After all, as the consumers, companies, and governments around the world go green, it only makes sense that EV demand will spike rapidly. That said, expect to pay a premium to buy EV stocks ahead of their anticipated earnings boom.
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Pros and Cons of Electric Vehicle Investing
There’s quite a bit to be excited about if you’re considering investing in the EV space. Not only are there huge opportunities, the topic is an exciting one, making research more fun. However, there are some drawbacks to investing in the space that you should consider before diving in. Here are the pros and cons:
Pros of EV Stocks
There are several benefits to investing in EV companies. Some of the most exciting include:
- Making a Change. These companies are actively working to solve a significant problem everyone faces: climate change. Investing in these companies is a way to put your money to work helping to solve this global challenge.
- Changing Regulations. Regulatory agencies in Canada recently announced they would ban internal combustion engines by no later than 2035, following a growing list of countries in Europe and other regions around the world who made similar commitments. This trend in regulation is great for the clean transportation industry, whether the company is focused on electric or fuel cell vehicles.
- An Overhaul of the Automotive Industry. As regulations change and consumers look for cleaner transportation alternatives, the entire automobile industry is undergoing an overhaul toward electric vehicles. According to Goldman Sachs, 25% of vehicles on the road will be electric by 2025, compared to just 5% today. As the EV market share of the vehicle market as a whole grows, those on the leading edge of this emerging technology are likely to reap the rewards.
- An Exciting Industry. The industry itself is home to the latest and greatest in technological innovation. As human beings, we’re naturally attracted to new technologies and scientific breakthroughs, which makes the necessary research into these companies and their activities more fun.
Cons of EV Stocks
Sure, there are plenty of reasons to be excited about an investment in the EV space, but there are also some drawbacks you should consider before jumping in.
- Excessively High Valuations. Emerging markets as exciting as the EV market are high-demand investments. Investors who see a pivotal change ahead see nothing but dollar signs, often pushing these stocks to extreme prices. When buying shares of EV stocks, you’ll generally pay a high price relative to the underlying value of these companies.
- Emerging Economy Risk. Many of the most popular EV stocks among investors represent Chinese companies. China is an emerging market bustling with opportunity, but it’s also the center of geopolitical tensions and faces heightened economic risk. According to Fortune, Chinese stocks recently took a hit as investors abandoned U.S.-listed companies from the region due to regulatory concerns. These risks should be considered.
- New Technology. When new technology hits the market, it’s exciting, but the first generations are rarely perfect. For example, EVs can only travel limited distances, usually 200 to 300 miles. Once the batteries die, they take hours to charge. While they make sense for a day-to-day driver, these vehicles would make long road trips inconvenient. These kinds of inefficiencies could result in losses until technological innovation catches up with consumer needs.
How Much Should You Invest in EV Stocks?
Everyone’s heard the expression “don’t put all your eggs in one basket.” If all your eggs are in one basket and that basket drops, you’re out of eggs.
This saying is no more true than in the stock market. In order to protect yourself from significant losses, it’s important to practice diversification, investing your money across a range of different stocks, bonds, and other asset classes.
If you want to get involved in the EV market, how much of your portfolio can you safely invest in these stocks?
As an emerging industry where the average company is far from profitable, investments in the sector should be viewed as high risk. That’s especially true when you consider the high cost of owning these stocks. As such, you shouldn’t invest more than 10% of your entire portfolio value in this class of stock.
Within the allocation you plan to invest in this class, consider where in the industry the company lies and its chances of becoming or maintaining its position as a dominant player. Safer, long-standing traditional manufacturers making an effort to roll with the tide should take the majority of your holdings in the space, with startups and other high-risk, high-reward opportunities constituting the remainder of the allocation.
EV-Focused ETFs Are a Compelling Choice for Beginners
If you’d like exposure to electric vehicles but don’t have much experience assessing investment opportunities, you may be better suited investing in EV-related exchange traded funds (ETFs).
These are investment vehicles that pool resources from a large group of investors, and use those resources to invest in a variety of companies involved in clean, renewable transportation.
When investing in an ETF focused on the EV industry, you’ll be investing in a large list of stocks chosen and managed by professionals, with a reasonably low cost. Investing in ETFs rather than picking individual stocks is a great choice for those who don’t know an industry inside and out.
All told, the EV market is an exciting one, filled with opportunities for investors who want to get in on the ground floor of a revolutionary transformation in the transportation industry. However, as with any new technology, there are several companies competing for their share of the market, some of which have much better odds of success than others.
The EV trend is quickly sweeping the globe, with many of the biggest winners being in China and other emerging economies. While these are exciting plays, it’s best to mix up your holdings, diversifying between companies that focus on both different areas of the market and different regions around the world.
Before investing in any stock, EV or otherwise, it’s important to do your research and get a thorough understanding of exactly what you’re buying. Nonetheless, considering the change in tides from a regulatory and consumer perspective, there’s never been a better time to consider investing in EV stocks.