There's been a lot of recent investor enthusiasm for electric vehicle (EV) names that still have operations and products on the drawing board. Other EV companies are bringing in revenue, but investors have pushed valuations to nosebleed levels. 

XL Fleet (NYSE:XL) is an EV company that went public in December after merging with a special purpose acquisition company (SPAC). And it has a growing existing business in an EV niche that many people may not have considered. The stock is down more than 25% from an initial pop, and though it's still not cheap by some valuation measures, XL has a clear path to grow the business into the valuation. For investors looking just a few years down the road, even a small position in XL makes sense today, making it my top renewable energy stock to buy in January.

XL Fleet conversions of General Motors pickup trucks.

XL Fleet conversions of General Motors commercial trucks. Image source: XL Fleet.

Saving energy today

XL isn't an EV original equipment manufacturer. Rather, it configures commercial and municipal fleets with electrification options. The company provides hybrid and plug-in hybrid electric drive systems for commercial fleet vehicles built by automakers Ford (NYSE:F)General Motors (NYSE:GM), and Isuzu, and for fleet owners like PepsiCo and FedEx. It's also developing a fully electric offering, and is adding XL Grid, a division to address the charging infrastructure needs of its more than 200 customers. 

XL's current electrification systems improve vehicle mileage by 25% and 50% for its hybrid powertrains and plug-in hybrid powertrains, respectively. They also reduce carbon dioxide emissions by up to 33%. XL's forthcoming fully electric platform will produce zero emissions. 

These options allow fleet owners to address sustainability initiatives today without having to spend additional capital for new vehicles and to grow charging infrastructure at the same time. And XL doesn't have to add new customers to grow. It is continually expanding its offerings. It recently announced it will offer a hybrid electric drive system for the Class 5 Ford F-550 Super Duty chassis, for example. The company said this was due to customer demand, and the new powertrain was brought to market within six months. 

XL Grid electric vehicle charger

XL Grid electric vehicle charger. Image source: XL Fleet.

Valuation matters

So how does an investor decide if the stock is too expensive? For many EV investors, it doesn't seem to matter, and prices have been driven to unsustainable levels. While XL Fleet doesn't appear undervalued at today's level, it also isn't counting on trends that might take five or 10 years to develop, or are out of its control. 

Management expects its current pipeline to support its estimate for revenue to triple to $75 million in 2021. XL reported growing, positive gross margins of 12.1% for the third quarter of 2020. The company believes it will dramatically grow its revenue by tripling again in 2022, and then grow to approximately $1.4 billion by 2024. Importantly, it expects this to be a relatively low-risk growth path, "selling existing products to existing customers through existing channels." 

Specifically, it will expand its powertrains to class 7 and 8 trucks -- garbage trucks, semi tractors, and transit buses -- and grow internationally, beginning in 2022. At the current share price, XL has a fully diluted market capitalization of about $3.4 billion. This includes outstanding options and warrants that aren't yet converted to common shares, but it's the more conservative way to look at it, assuming those will convert and add to the share count. 

What could go wrong?

In a word, plenty. An investment right now in the electrification of transportation is on the high end of the risk spectrum, regardless of the sub-sector. XL's products are somewhat of a bridge until vehicles are all fully electric. That day may be many years, if not decades away. And XL plans to have a fully electric powertrain offering of its own. But there is still risk in how electric vehicle growth will progress.

Any money in the sector should be within the aggressive portion of a portfolio, and investors need to have the ability to withstand volatility. At today's price of $23.73 per share, XL trades at about 2.6 times expected 2024 sales. Considering the risks to that sales estimate being achieved, it seems like a reasonable valuation.

Along the way, shares could drop 50% from here, if investors' mood for aggressive renewable energy stocks wanes. But if XL achieves its goals, shares will have already reacted by then, and today's price will look like a great investment in hindsight. For those who want to take that risk and have some skin in the game, now is a good time to start a position in XL, making it my top renewable energy stock to buy this month. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.