Electric vehicles are all the rage, both on Wall Street and among drivers. Consumers are warming to electric vehicles in record numbers, causing investors to buy into both start-ups and well-established incumbents supplying the vehicles and the accessories needed.
So far investors have seen a lot more green than red in EV stocks, but we all know that is subject to change at any moment. After years of gains some fear a bear market might be right around the corner, at which time we will get a better idea of who are the contenders and who are the pretenders among EV-focused companies.
We're not here to predict a downturn is imminent, but we do have some ideas of stocks that figure to do well even if a crash is right around the corner. Here's why three Fool contributors believe Panasonic (OTC:PCRFY), Tesla (NASDAQ:TSLA), and Duke Energy (NYSE:DUK) are good candidates to outlive whatever market turbulence might come our way.
This stock can power through whatever lies ahead
Lou Whiteman (Panasonic): We're in the early days of the green revolution sweeping through the auto industry, and it is way too soon to pick winners among the myriad young companies vying to be the next big thing. But I've seen enough to declare the days of the internal combustion engine are numbered, and that batteries will play a big role in what comes next.
There are plenty of battery start-ups that investors can choose from, including Quantumscape and Romeo Power, but in the event of a market crash it is hard to say for sure these young companies will have the wherewithal to survive. Japanese conglomerate Panasonic, on the other hand, has the size and the products it needs to survive even the worst storm.
Panasonic is a century-old Japanese electronics conglomerate that in recent years has built a strong EV battery business. It has partnered with Tesla since 2009, with a North American battery production facility at Tesla's massive Nevada gigafactory. But of late it has been looking to diversify past Tesla, selling its stake in the EV giant and signing a new deal with Toyota Motor (NYSE:TM) and exploring potential relationships in Europe.
Panasonic faces a lot of competition from start-ups and larger batterymakers including LG Chem, but with automakers including General Motors and Volkswagen committing their future to electric and nearly all others at least moving in that direction there should be massive demand coming online in the years to come. And Panasonic thanks to its large size, its reach into a variety of businesses, and $1.5 billion in cash on hand, is set up better than its upstart rivals to make it through any potential lull that might lie ahead.
Something big has changed about Tesla in the last year
John Rosevear (Tesla): I've never been a big fan of Tesla as an investment. My sense -- as someone who has made a living following the auto industry for a long time -- is that the assumptions auto investors have baked into the stock's valuation are wildly unrealistic.
That has only felt more true as the stock's valuation has skyrocketed since the beginning of 2020. But I have to give credit where it's due: That sky-high valuation has given Tesla the opportunity to do something extremely sensible, namely building up a sizable cash hoard.
Here's why that's a big deal.
The auto industry learned several grim lessons from the 2008-2009 economic crisis. Perhaps the most important lesson was that a big cash hoard (think $20 billion or more for a major global automaker) is a very good thing to have when the economy goes sour.
Auto manufacturing is a business that requires huge up-front investments (in factories and tooling and product development) before a single new vehicle ships. Those high costs mean auto factories tend to break even at around 80% of their capacity (where "capacity" is defined as the factory running at full speed with two shifts of workers, five days a week).
At the same time, auto sales are cyclical. They tend to closely track consumer confidence. It's not hard to understand why: If you're feeling uncertain about your job or your business, you're not likely to splurge on new vehicles unless they're urgently needed.
Historically, those two factors have meant that automakers' profits tend to shrink drastically (or even swing to losses) during recessions. That in turn led automakers to cut spending on future products during downturns.
The lesson of 2008-2009 is that an automaker that doesn't have to cut spending on future products can find itself at an advantage in the early stages of the recovery, when it has fresh new products in its showrooms. While most rivals, even Toyota, had been forced to make deep cuts to future-products spending, Ford Motor Company and Hyundai had managed to keep their new-product programs on track (and their companies afloat) through the crisis, thanks to the hefty cash reserves they had put together beforehand. Both had fresh products in showrooms when buyers returned in 2010 and 2011, and both were able to win new customers and gain market share from rivals.
Since then, a big cash reserve has become table stakes in autos. Tesla's stock-price surge over the last year-plus gave it the opportunity to put together a significant reserve of its own: $16.2 billion as of the end of June, roughly double the amount of cash it had a year earlier.
That should be ample to see it through the next big downturn, whenever it arrives. And that's why I think -- whatever you or I might think about today's valuation -- Tesla has effectively crash-proofed its business. That's a significant development.
You might not think this is an EV stock -- but it really is
Rich Smith (Duke Energy): I'll admit, at first thought, I was planning to suggest one of the several EV charging stocks for this topic -- Blink Charging or ChargePoint for example. With electric car sales zooming from 2% of U.S. retail sales last year to as much as 20% by 2025 -- and 50% by 2030, according to UBS -- it stands to reason that someone is going to have to provide electricity to keep all those energizer bunnies hopping, stock market crash or no.
But here's the thing: Neither Blink nor ChargePoint is currently profitable, and while both have sizable cash hoards, with Blink burning through nearly $30 million a year, and ChargePoint burning more than $100 million, I simply am not convinced those companies can weather a prolonged downturn in the economy.
But do you know who might? Duke Energy Corporation.
In a column earlier this week, The Wall Street Journal pointed out how Duke is part of the Electric Highway Coalition, the largest regional alliance building and operating electric car charging stations in the United States. American Electric Power is also a member, but I prefer Duke over AEP because, in addition to being profitable, Duke is free cash flow positive, with $100 million more cash generated over the past year than it spent on its capital needs. If a recession comes rolling around, that extra cash could come in handy.
Meanwhile, with an $81.8 billion market cap and $23.6 billion in annual revenue, Duke dwarfs even the biggest pure-play charging station stocks in size, giving it the financial heft to survive even a prolonged downturn. And later, when the stock market crash is over but the electric car industry keeps growing -- and the demand for electricity with it -- I fully expect Duke Energy to be one of the survivors.