Among all the other reasons the year 2020 was one for the record books, investors will remember it as the year of the electric vehicle (EV) stock.
While EV companies, most notably Tesla, have been around for years, 2020 was the year the markets officially became enamored with the potential for the technology to disrupt the traditional automakers. Tesla shares are up nearly 600% for the year, and a number of younger companies targeting the massive Chinese automotive market have posted strong performances as well.
It is hard to believe the near-term surge is sustainable, and at some point a lot of these stocks might need time off the road to recharge. But the potential of electrification in the world's largest automotive market is real, and there are going to be some great long-term investments to come of out of this supertrend.
This SUV specialist is well positioned to win
Lou Whiteman (Li Auto): Li Auto went public only in late July, but this Chinese maker of premium electric SUVs has spent most of the time since traveling in the fast lane.
Li is selling one vehicle right now, a family-sized SUV named the Li One. In its registration statement to go public, the company argues that the SUV segment is quickly becoming the largest part of the Chinese automotive market, which is one reason why the company plans to roll out four additional SUVs in the coming years.
The Li One also comes with an onboard gasoline generator that supplements the battery and acts as a range extender, giving customers peace of mind when recharging stations aren't available. That's an important selling point in China, where EV sales are booming but charging infrastructure, especially outside of major urban areas, is yet to catch up.
Li Auto expects to sell about 30,000 vehicles this year, but Goldman Sachs analyst Fei Fang says it has the infrastructure in place to manufacture up to about 500,000 annually without much added construction cost. The analyst expects the company to get to that sales number by 2025.
As exciting as the potential is, we should note there is clearly a frenzy around EV stocks and the current valuations might not be sustainable in the near term. Li Auto shares are up 142% in just four months since the company went public. Its market cap, at $34 billion, is in line with that of Ford Motor Company despite having one-tenth of the revenue.
But even if there could be some near-term turbulence, Li is set up well to be a long-term survivor. It's attacking an attractive niche in the Chinese market, and it has a product out there that seems to be selling well. The company's founder and CEO, Xiang Li, has experience with U.S. public markets through his last start-up, Autohome. And as the owner of 21% of Li Auto's shares, his interests are tied to those of shareholders.
There's a lot of risk involved in EV stocks, but also a lot of potential. Li Auto isn't a "set it and forget it" style investment and isn't well suited for those with a conservative bent. But a few shares now could be a gift that keeps giving for years to come if the company's business goes to plan.
The top Chinese EV maker in the most profitable part of the market
John Rosevear (NIO): To my mind, NIO is the best long-term bet of the Chinese EV makers. While the stock has become expensive after an epic run since early 2020, I think there might be a lot more in the tank for investors who can take a longer-term view.
- China is the world's largest new-vehicle market, and the Chinese government is pushing the adoption of electric vehicles;
- As in other auto markets, upscale, premium market segments are where the fattest margins will be found among electric vehicles;
- And right now, according to Bank of America, NIO and Tesla together have about 90% of the market for premium electric vehicles in China.
We all know how Tesla's stock has performed over the last couple of years. That doesn't necessarily mean that NIO's stock will follow the same path, of course. But NIO is the homegrown favorite -- that counts for something in China -- and after a near-bankruptcy experience early in 2020, it's now flush with cash and scrambling to increase production.
It's a safe bet that big sales growth is coming. At least one analyst expects NIO to deliver 100,000 vehicles next year, up from probably about 45,000 this year. Given NIO's production plans, I think that's a reasonable expectation, maybe even a bit conservative -- and I think it's also reasonable to expect big growth for at least the next several years after that.
Yes, NIO's stock isn't cheap. But neither was Tesla's at $100, and we all know how that played out. NIO's stock might or might not follow the same path, but the company's future looks quite bright from here.
This Chinese car company has its pedal to the metal
Rich Smith (XPeng): For investors at least, Chinese EV stocks could be the Tickle Me Elmo of Christmas 2020 -- the must-have gift everyone wants to find under their Christmas tree or stuffed into their stockings -- and China's XPeng should be at the top of everyone's wish list.
Consider the numbers: From barely $1 million in sales in 2018, XPeng has already rushed ahead to book more than half a billion dollars in sales over the last 12 months. By 2022, analysts project XPeng will tip the scales at a mind-boggling $4.1 billion (according to data from S&P Global Market Intelligence). If they're right about that, this company will have gone from $1 million to more than $4 billion in sales in less than four years.
That's pedal to the metal growth, folks. And XPeng isn't just moving metal -- it's breaking new ground in automotive technology, too.
Last week, the company unveiled a "next-generation autonomous driving architecture" in which its electric cars will become increasingly autonomous (i.e., self-driving) as they're outfitted with cameras, radar, ultrasonic sensors -- and lidar (laser for imaging, detection, and ranging). In fact, as XPeng boasted in its press release, it will be the first car company in the world to incorporate lidar into a production-ready car, beginning with vehicles in its 2021 model year lineup.
Such technological leadership should help XPeng secure a strong position in the Chinese automotive market, where EV sales are expected to grow 43% annually over the next five years. Indeed, by the end of that period -- by 2025 -- investment bank J.P. Morgan projects that 7% of all electric cars sold in the Middle Kingdom will be XPeng electric cars.