The astounding rise in shares of Tesla (TSLA -3.21%) over the past 20 months is a likely reason that other electric vehicle (EV) start-ups decided to go public last year. Many used mergers with special purpose acquisition companies (SPACs) to raise capital and enter the public markets.
Tesla's stock has soared over 1,200% since the fall of 2019, as the company ramped up production to become the leading global EV maker. But investors still valued the company on its potential, rather than actual sales and current business fundamentals. The same happened with many EV start-ups that went public in 2020 -- many of which are still pre-revenue and haven't produced a single product.
Some amount of reality set in this year, however, and many of those stocks crashed back down to earth. That makes it a good time to see if adding EV names to your portfolio makes sense now.
Start with the potential market
The first thing investors should look into is how big the sector could become. The electrification of transportation is a trend that is here to stay. Many traditional automotive companies have given a timeline for when they will strictly be selling EVs.
Global passenger EV sales are expected to jump from 3.1 million in 2020 to 14 million by 2025, and potentially more than 60 million by 2040, according to the 2021 EV outlook report by industry research provider BloombergNEF. In the large automotive markets of Germany and China, the firm believes EVs will represent nearly 40% and 25%, respectively, of total auto sales just by 2025.
Tesla is clearly the first mover, and current leader, in the sector. And investors who believe the company will eventually be making several million cars annually might feel like the $675 billion market cap is justifiable. That's especially true if you see the company's future also including batteries, solar power, and storage products. But there are many other options as well for investors to consider.
Several different approaches
One new entrant in the public markets is Lucid Group (LCID -0.46%), which just closed a SPAC merger to trade publicly on its own. CEO Peter Rawlinson was the former chief engineer for Tesla's Model S project, and investors have high hopes that he can repeat that success at Lucid. He is taking a similar initial approach with plans to produce a high-end sedan costing more than $160,000, and then expand to more-affordable models. But Lucid is also richly priced, and won't even begin selling its vehicles until later in the year.
And there are other speculative names like Lucid, though some are already selling vehicles and growing quickly. Chinese EV makers including Nio, BYD, and XPeng are in that group.
Of course, established automakers like General Motors, Ford, and Volkswagen are diving headfirst into EVs, and investors may feel like that's a more conservative way to play the sector. Another established company, Magna International, is a supplier to large established automakers, but also has a partnership with start-up Fisker to manufacture that company's Ocean luxury electric SUV.
Whether now is the time for investors to buy EV stocks depends on several details. They need to be a fit in your existing portfolio, and it depends on how much risk you're willing to take. But some of the above names have come down in price over the past six months, making now a good time to dig in and do more research.
It's likely that several EV start-ups will ultimately fail. Some investments may go to zero, while others could take off like Tesla has. Certainly, any company that is pre-revenue or not yet profitable should be considered a speculative purchase. But for those with a long-term mindset, and a proper allocation in relation to risk, now could be a good time to get into the blossoming industry early.