Want to invest in electric vehicles? Start with their parts
Seth Goldstein, chair of Morningstar’s Electric Vehicle Committee, spends his days analyzing what’s under the hood of Tesla’s Model 3, China’s NIO ES6 SUV and Ford’s new Mustang Mach-E.
That’s because for now the best potential stock investments in the electric vehicle (EV) business, which hit a soft spot in 2019, aren’t necessarily the carmakers managing the capital-intensive shift away from gas-powered autos, the Wall Street analyst says. It’s companies that produce the computer chips, parts that enable electrification, and metals like lithium for longer-lasting batteries that he’s more upbeat on.
Investors are making a bet on electric vehicles going mainstream. (Photo: Tesla)
“As (EVs) gain wider adoption over the next decade or two, I see a lot of good long-term opportunities owning high-quality companies throughout the entire EV supply chain,” Goldstein tells USA TODAY.
When it comes to EV investing, there are pure plays like electric-vehicle maker Tesla (TSLA). But there are also opportunities to invest in semiconductor makers like Nvidia (NVDA), which produce chips that act as the EV’s brain.
Or you could buy shares of Albemarle (ALB), a leading producer of low-cost lithium, a key component in EV batteries. Or you could put your money to work in diversified auto parts maker BorgWarner (BWA), which benefits from making parts for gas-powered engines and its emerging revenue streams from electric vehicle components.
Investors are making a bet on EVs going mainstream. The global sales outlook is promising.
EV sales, which first topped 1 million globally in 2017 and hit 2 million in 2018, are expected to increase to 4 million by 2020 and 21 million by 2030, according to a Deloitte report.
EV’s share of the total automotive market (now roughly 2%) is expected to grow rapidly, reaching 10% by 2024, Deloitte says. China is the biggest EV market, accounting for roughly half of sales, followed by Europe and the U.S.
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A critical change is expected in 2022, when the cost of an electric vehicle will fall enough to equal the cost of a gas-powered car.
“With costs of ownership no longer a barrier to purchase, (electric vehicles) will become a realistic, viable option for any new car buyer,” Deloitte concluded.
Electrification of transportation is a trend that’s not going away, creating long-term growth opportunities for investors.
“We are generally pretty bullish on EV technology,” says Pawel Wroblewski, an international growth stock fund manager at ClearBridge Investments. “Electrified cars are a disruptive technology.”
Four trends are driving the mass adoption of electric vehicles, says Asutosh Padhi, senior partner at McKinsey & Co. “More customers are actually considering electric vehicles,” Padhi said in a video on McKinsey’s website, noting that 30% to 45% of vehicle buyers in the U.S., Germany and China now consider an EV.
The economics of EV ownership has also improved. McKinsey says battery costs have fallen about 80% since 2010, and they’re expected to decline by another 50% in the next few years. Government regulations and policies, such as stricter emissions and fuel-economy targets, are favorable to environmentally-friendly electric vehicles.
Finally, car-charging infrastructure has improved, although some regions of the U.S. are farther ahead than others.
So how should someone interested in investing in EVs go about it?
Buy ‘pure’ plays like Tesla
Tesla isn’t devoid of challenges. It must prove it can post consistent profits, control costs, meet production and delivery targets, fend off rivals, cope with a recent sales slowdown in China and roll out new models. But the electric car maker, which surprised Wall Street with third-quarter 2019 earnings of 78 cents a share vs. an expected loss, remains an industry leader working towards sustainable profitability.
Analyst Sam Korus at ARK Invest, a firm that’s bullish on Tesla, says the stock will double in price the next five years even under the firm’s most downbeat forecast – and could climb to $4,000 per share if ARK’s bull case plays out. Shares traded at over $450 on Friday.
Tesla remains an industry leader working towards sustainable profitability. (Photo: Tesla)
Tesla has four competitive advantages working in its favor, Korus says. Tesla EVs have a much longer range than competitors when it comes to battery life. Their ability to send over-the-air software updates provides another edge. Tesla’s self-driving technology also gives it a lead in the autonomous car race, as does its unmatched collection of real-world driving data.
ARK‘s bear case assumes Tesla’s plan to launch a fully autonomous taxi network doesn’t happen, reducing its global EV market share from 17% to 6%. Under that scenario, it would sell roughly 1.7 million to 2 million cars in 2023, which would still enable its stock to double in the next five years, ARK says. The bull case assumes Tesla’s self-driving fleet projections pan out, which would boost Tesla vehicle sales to roughly 6 million.
Investors who expect a sales rebound in China and continued long-term growth can consider Chinese electric carmaker NIO, adds Wroblewski. NIO shares, hurt by a 2019 sales slowdown, are trading far below their 52-week high.
The more technologically advanced autos become, the greater the need for semiconductors. Chips are needed to power EV batteries and powertrain components, as well as provide software and firmware updates. The shift to self-driving cars also boosts chip demand.
“Chips are like the brains of the vehicle,” Korus says.
Chip stocks with EV exposure, analysts say, include Nvidia, Maxim Integrated Products (MXIM), NXP Semiconductors (NXPI) and TE Connectivity (TEL).
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Buy auto parts suppliers
The companies selling EV parts and components will benefit from the mass adoption of electrified vehicles and bulk sales to “fleet” buyers like Amazon, analysts say.
Korus owns auto parts supplier Aptiv (APTV) in his fund. “If you don’t have the expertise in manufacturing and EV, they give you the parts to make one,” he says.
Investors that want to hedge their bets should consider BorgWarner. The established auto parts maker is a diversified way to play the transition from gas-powered cars to EVs, as it will generate revenue streams from both types of vehicles during the multi-year shift to electrified and autonomous transportation, says Morningstar’s Goldstein.
Oddly, even though batteries are the key component that propel EVs down the nation’s highways, Korus views battery makers as offering less value to investors, mainly because batteries are quickly becoming commoditized.
Analysts are less bullish on car manufacturers now diving into EV, such as Ford, GM and Volkswagen. The reason: Profits will be held back by still-high EV manufacturing costs relative to gas-powered cars.
Automakers also face the balancing act of investing for the EV future while simultaneously meeting increasingly strict emissions standards and government regulations on existing gas-powered vehicles, Goldstein says.
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