Electric vehicles and related stocks have been some of the hottest on the market over the past year. Tesla (TSLA 12.06%) has surged to new highs, and newcomers like Fisker (FSRN 12.68%), Blink Charging (BLNK -0.85%), Nikola (NKLA -2.41%), and others have either hit the market with multi-billion dollar valuations.
Why are EVs such a hot market right now? In a word: growth.
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The booming EV market
In 2011, about 45,000 electric vehicles were sold globally, according to data from the International Energy Agency (IEA). By 2020, sales of electric vehicles had ballooned to 3.24 million, according to estimates from ev-volumes.com. And that doesn't include sales from dozens of new models hitting the market in the next few years.
A lot has changed in the last decade. Range anxiety has faded away as the number of vehicles with 300 miles or more in range is growing and the network of charging stations is proliferating. Meanwhile, costs are coming down and today it's (finally) nearly as cost effective to buy an EV as a traditional vehicle.
Given these trends, investors are seeing an opportunity to disrupt the old, established players in the auto market.
Disrupting Detroit
A big part of the allure of EV upstarts is the enormous market they're entering. Just look at how GM (GM -0.04%), Ford (F 0.08%), Honda (HMC -0.49%), Toyota (TM 1.07%), and Volkswagen (VWAGY -1.13%) dwarf a relatively established company like Tesla's revenue today. These five traditional auto companies generated over $800 billion in revenue over the past year, and any EV upstart that captures even a few percentage points of that market could be a huge success.
GM Revenue (TTM) data by YCharts
There are reasons to be bullish on EVs and even EV start-ups. EVs could generate higher margins than internal combustion vehicles as costs come down. For start-ups, the opportunity to build a business without dealers engrained in the business model is another huge advantage. And the electrification of all things transportation may just be getting started.
The allure of autonomous driving
On top of the growth EVs have already demonstrated, investors see more potential for autonomous driving from EV companies than their Detroit rivals. Tesla has proven that people are willing to pay for autonomous driving technology as essentially software as a service. And most EV companies today are incorporating autonomous technology in one form or another.
The difficulty is figuring out the sustainability of autonomous software as a business for automakers. Tesla's early adopters are paying $10,000 for the "Full Self-Driving" option, and that sets a benchmark for others to follow. While it may take a while for companies to figure out how much autonomous driving technology is worth and how to make money off it, investors see this as an option to generate incrementally higher margin revenue off each sale. Tesla, GM, Rivian, and many others are including some self-driving features or driver assistance systems that investors see as another growth opportunity tied to EVs.
Will the euphoria continue?
Thus far, electric vehicle stocks have been living off the market's hype and projections about future growth. Highly valued companies like Fisker, Nikola, and Rivian haven't even generated revenue, much less a profit. But the rubber will hit the road soon.
In the next three years, dozens of EV models will be released and legacy automakers will make their run at the market. General Motors (GM -0.04%) has said it will make only electric vehicles by 2035, and VW says 50% of its U.S. sales will be electric by 2030. Big auto is coming for the upstarts, and it could be a battle that defines the auto industry over the next decade.
