The great divide that once separated electric car companies from legacy automakers is fading. Nowadays, virtually every major player is rolling out new electric vehicle (EV) options to diversify their lineups and attract more customers.

Ford's F-150 Lightning is the latest EV that's taking the auto industry by storm. Like the Toyota BZ4X (which is loosely based on its RAV4), Ford is making an EV-version of one of its most popular models. And it's using its scale to do it at an affordable price. With a federal tax credit, the base F-150 Lightning would be a comparable price to the gas-powered F-150.

EVs have always had a leg up in terms of environmental benefits, lower noise, and less maintenance. But up until now, price and a lack of infrastructure, like charging stations, were formidable barriers to entry. From Washington D.C., to Wall Street, To Main Street, everyone is starting to take EVs more seriously. Here's what to watch in the sector, as well as some stocks that may be worth buying now.

An adult and a child work together to charge an electric vehicle.

Image source: Getty Images.

The year of going carbon neutral

2020 will forever be remembered as a year defined by the COVID-19 pandemic. However, it was also one of the biggest years for countries and companies to announce plans to reduce emissions. The EU and Japan have officially pledged to be carbon neutral by 2050. Even China says it will be carbon neutral by 2060. 

Many companies have followed suit, most notably integrated oil and gas majors. European giants like Royal Dutch Shell, BP, and Equinor are all slashing oil and gas spending in favor of renewable efforts.

But it's not just energy companies that are directly addressing emissions. Industrial giants like Honeywell have pledged to reach carbon neutrality by 2035. Amazon plans to be carbon neutral by 2040. And, which reached carbon neutrality in 2017, is working toward using 100% renewable energy across its global operations. 

"Carbon neutral" is a term that's thrown around a lot nowadays. It theoretically means a net-zero contribution of CO2 emissions, but there's some nuance to this.

Scope 1 emissions directly result from an organization's operations. For a company like United Parcel Service (UPS -0.75%), this would mean pollution from its planes, delivery trucks, office buildings, etc. Scope 2 are indirect emissions, such as purchasing electricity to run a business. For example, a company could purchase electricity produced by natural gas or renewable sources instead of coal to lower emissions.

Scope 3 is the final step, which includes all emissions associated with that company, including the gas its employees burn to commute to work, etc. It's important to bear in mind that countries and companies that discuss carbon neutrality are typically referring to Scope 1 emissions only, although there are some exceptions.

A transparent car with a glass border surrounded by trees.

Image source: Getty Images.

How EVs fit in

Differentiating between Scope 1, 2, and 3 emissions matters because it can help investors understand the role EVs are likely to play in lowering emissions for many companies and countries. Package-delivery businesses like UPS and FedEx (FDX -0.89%) stand to benefit from electrifying their fleets because it directly reduces Scope 1 emissions.

FedEx has pegged electrification as a primary driver behind reaching carbon neutrality by 2040. And UPS is experimenting with electric aircraft as a service for small- and medium-sized businesses. The U.S. Postal Service (USPS) is interested in updating its much-outdated fleet with EVs, as well. Then there's the civilian market.

Although EV use has picked up steam in Europe and China, it's still a tiny fraction of the U.S. market. According to research by S&P Global, total 2019 U.S. EV sales were 331,000, or less than 2% of total vehicle sales. States could play a role in increasing these numbers. Announced in September 2020, California plans to pass regulations that require all new vehicles to be net zero by 2035. 

Low-EV adoption has many explanations, but perhaps the best point is that EVs are just too expensive for the majority of Americans. And since most EV models are fairly new, there's a limited supply of used cars. However, a 2020 survey by Consumer Reports suggests that 31% of Americans would either consider getting or plan to get an EV for their next vehicle purchase or lease 

What companies are doing

We saw tons of countries and companies jump on the carbon-neutral bandwagon in 2020, and now we're seeing several automakers announcing new EV lineups. Toyota joined General Motors, Honda, Volkswagen, and others with its April announcement to launch 15 new battery-electric vehicles (BEVs) by 2025. The Ford F-150 Lightning is arguably the biggest electric truck unveiling we've seen since Tesla's Cybertruck. The introduction of more models should help to increase the total addressable market (TAM) of EVs as consumers that were once "priced out" gain access to more affordable options.

Two stocks to watch

Aside from the big-name automakers, Lucid Motors, which is about to merge with a SPAC called Churchill Capital IV (CCIV), could be a company worth watching. It's looking to challenge Tesla in the luxury EV market.

The company recently provided investors with six major updates, most notably that reservations for the Lucid Air passed 9,000. It plans to begin delivering the luxury sedan this year. Lucid Motors carries a hefty valuation for an unproven company, but if it can grow at the rate management hopes, it could be a high-risk high-reward stock worth buying.

Aside from the automakers, ChargePoint (CHPT 3.42%) would be one way to invest in the growth potential of the EV market. The company is North America's market leader in EV charging.

Unlike automakers competing in the same playing field, ChargePoint stands to benefit from the widespread adoption of EVs. It earns revenue when businesses install charging stations for their customers or employees, or from residential customers through at-home solutions. It's also investing in fleet charging that could benefit large transportation companies like UPS and FedEx, all the way down to small companies (think moving companies, buses, etc.). 

Taking a measured approach

In both the public and private sectors, much of the buzz surrounding EVs is based on expectations rather than results. Whether it's a target that's three decades away or a concept car that's yet to be scaled, it's important not to take these goals for granted. Just like in the early days of the gasoline-powered automobile, fierce competition will result in many business failures.

The EV sector is likely to be an exciting place to invest for years to come, but we're still in the early innings. With so much uncertainty, investors would do well to understand the risks many of these companies face and tailor their allocations accordingly.