The heyday of gas-powered vehicles is winding down. America’s largest car market, California, plans to ban the sale of new combustion engine vehicles by 2035. General Motors recently announced it will sell only zero-emission vehicles by 2035. Electric vehicle manufacturer Tesla is dramatically expanding its global capacity and made over 500,000 cars in 2020, a feat that seemed impossible just a few years ago.
Since the EV market is growing rapidly, should you have EV stocks in your investment portfolio? Some investors are purchasing stocks in the anticipation of high returns. When investing, it’s also important to look at all the industries that will be affected by the EV transition, not just the vehicle manufacturers.
Let’s explore the dynamic EV investment market.
Consider the Whole Supply Chain
Different inputs are needed to manufacture a zero-emissions vehicle compared to its gas-powered counterpart. Likewise, charging infrastructure is necessary to keep cars charged on the go, like next-generation gas stations.
Blink Charging (BLNK) operates the largest public charging network in the U.S. and has stations in airports and hotels. Unfortunately, the company has not had a profitable year and funds its operations with debt and equity financing. Its stock grew nearly 2,200% in 2020, raising some concerns about a market correction. On the other hand, President Biden recently signed an executive order calling for the construction of 500,000 charging stations in the U.S.
Plug Power (PLUG) manufactures hydrogen fuel cells for equipment and electric vehicles. Although the company has been in business for 20 years and has a growing list of notable customers, it hasn’t ever been profitable. Regardless, its stock soared more than 1,000% in 2020, raising concern that it’s overvalued. Yet, profitability could be on the horizon. Plug Power has ambitious sales goals, is introducting its technology for consumers and business customers, and has a customer list that includes Amazon, Walmart, and Home Depot.
Rare earth elements (REEs) are a vital ingredient in certain clean energy products, including the magnets used in EVs. Medallion Resources Ltd. (MLLOF), Lynas Rare Earths Ltd. (LYSCF), and MP Materials Corp. (MP) work in this space.
Beware of Stock Bubbles
Just because the EV market is poised for exceptional growth doesn’t mean all the players will be winners. Blink Charging, for example, might never be highly profitable even when the U.S. charging infrastructure is rapidly developing. The stock of zero-emissions truck company Nikola Corporation has plummeted since a high in June 2020 due to allegations of fraud, the CEO stepping down, and an SEC investigation. To date, the company has not produced a single vehicle but has a $600 million factory under construction.
Tesla stock rose 695% in 2020, wooing some investors and concerning others. Tesla’s price-to-earnings ratio (PE) ended 2020 at over 1,200. By contrast, 25 to 30 is considered a high price-earnings ratio in most industries and as of January 2021, the average PE was only 27.43, according to New York University’s Stern School of Business. Tesla’s is especially high due to large investments in manufacturing capacity and R&D. Investments in R&D totaled $1.5 billion in 2020 alone. As more EVs are introduced, Tesla’s PE will certainly face downward pressure as its currently dominant share of EV revenue is fractured by consumers choosing other carmakers’ electric options.
Tesla currently has factories that are either operational or under construction in Freemont, California; Reno, Nevada; Austin, Texas; Berlin, Germany; and Shanghai. Although their stock could be overvalued, others are optimistic. The company is among the world’s most vertically integrated, and the Reno plant is expected to be the largest building in the world. Tesla is undoubtedly well poised to capture a large share of the EV market if its plans pan out.
Another noteworthy EV manufacturer is Nio, an all-electric Chinese luxury car manufacturer. China is the world’s largest automotive market and EV market, and the company has received support from the Chinese government to keep its operations growing. It is earlier in its growth phase than Tesla but does seem promising. It uses a vehicle swap technology that helps solve the issue of road-trip recharging. Some investors are concerned about the risks associated with investing in a Chinese company.
It’s also possible the traditional automakers, such as GM and Ford will capture a large market share. This seems more likely with GM, who has taken a more aggressive approach to the EV market. Ford did release the Mustang Mach-E but has taken a more cautious approach overall.
Explore Clean Energy ETFs
Exchange-traded funds (ETFs) are an excellent way to diversify your investments within the EV sector without spending endless hours researching. These funds are new to the market and most have only been around for a few years at most. There are numerous ETFs that relate to electric vehicles and their supply chains.
Global X Autonomous & Electric Vehicles ETF (DRIV) invests in autonomous driving technology, EV manufacturers, materials, and components. Lithium & Battery Tech ETF (LIT) “invests in the full lithium cycle, from mining and refining the metal, through battery production.” First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) invests in a variety of clean energy technologies including electric vehicles and solar energy. Some of its top holdings are Nio, Tesla, and Plug Power.
Beware of Policy Changes
Government policies can help or hinder the development of the EV market. The Biden administration seems to be very supportive of zero-emission vehicles and recently vowed to replace the government’s fleet of 650,000 cars, vans and trucks with EVs. This federal investment should drive the cost of EV components down, but this does not ensure that all consumers will embrace electric options.
In 2018, the Chinese government slashed subsidies for solar energy. Although this is a different technology, it demonstrates how sudden policy changes can create shockwaves in a budding industry that benefits greatly from supportive policies.
Are EVs Greener Than Gas-powered Cars?
Many investors want to align their values with their investments. However, there is concern about the carbon emissions from the manufacture of electric vehicles. The battery requires rare earth metals that cause pollution during the extraction and manufacturing process.
The exact impact varies depending on the efficiency of the manufacturing techniques. Chinese battery manufacturers can generate up to 60% more carbon dioxide emissions producing an EV than a car with an internal combustion engine. Thus, the country where the batteries are created and the techniques used can have a significant impact on the environment.
A 2017 study shows that when using U.S. or European techniques, the emissions created from the manufacturing of EVs are comparable or slightly higher than internal combustion vehicles. However, when taking the entire lifecycle of an EV into account, they have a far lighter footprint. This is especially true when cars are charged with clean energy.