The question of whether electric vehicle (EV) stocks are overhyped is a legitimate one. One only has to look at the performance of a stock like Tesla (TSLA 4.96%) over the last several years to see why it's worth researching whether to invest in the sector.
Tesla shares have soared 1,800% over the past three years. In that time, Tesla went from recording a net loss of over $860 million in 2019 to profits of $719 million in 2020 and an impressive $5.5 billion in 2021. So while investors had hyped, and arguably overpriced, Tesla stock for many years, the business has proven itself. Investors now want to know what other EV companies could follow that path.
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Reason to be excited
Tesla has a dynamic and talented CEO in Elon Musk who has brought added attention to his company and the EV sector. But its the market he identified early that really has amped up investor interest in EV businesses. Global sales of battery electric vehicles (BEV) have soared over the last five years, with an annual growth rate of 47%.
Global BEV sales have grown at an annual rate of 47% since 2016.
Tesla estimates that its own production volume will continue to grow by at least 50% annually for the next several years as well. Worldwide EV sales are expected to reach between about 25 million and 45 million in 2030 according to the International Energy Agency (IEA). Tesla may continue to be the leader, but that leaves plenty of opportunity for other companies, and their shareholders, to profit.
Investment options
There are many ways to invest in addition to Tesla going forward. Some of the stocks of those EV manufacturers have also gotten plenty of hype. Valuations in U.S. start-ups like Rivian Automotive and Lucid Group have soared even with vehicle production levels still minuscule. Though revenue is just beginning to flow for them, both are priced at a market capitalization of more than $40 billion. For perspective, Tesla initially crossed that valuation threshold in mid-2017, a year when its revenue surpassed $10 billion for the first time.
Much of the hype around EV makers outside the U.S. has focused on Chinese companies like Nio (NIO -0.48%) and XPeng. Both have established EV businesses and have cumulatively shipped more than 180,000 and 157,000 fully electric vehicles, respectively, as of the end of Feb. 2022. While not yet profitable, both were recently trading at price-to-sales (P/S) ratios of under 10.
Hype versus results
That kind of valuation level may still qualify as being hype, but the underlying businesses are making progress toward justifying it. Ironically, China's largest EV maker is one that doesn't get much hype and is reasonably valued by traditional metrics. BYD (BYDDY 1.91%), the large Chinese automaker backed by Warren Buffett's Berkshire Hathaway, is profitable, and its American depositary receipts (ADRs) trade at the modest P/S of just 2.7.
BYD is much more than just an electric car maker, however. It manufactures traditional internal combustion vehicles, batteries, and electric buses, making it less of a pure play. That has kept it somewhat under the radar for EV-focused investors.
So while there are some stocks that are overhyped relative to the underlying businesses at the current stage, the businesses have plenty of room to grow. Battery electric vehicle sales were just a small fraction of the more than 65 million automobiles sold worldwide in 2021.
Many investors think Tesla is still an overpriced stock. But that hasn't kept the stock from continuing to move up as the business has flourished. The hype comes because investors don't have a way to see just where the business growth might level off. That's also what is occurring with other EV stocks, and the businesses that are successful in the long term should live up to that hype as they satisfy what could be massive market demand.
