March was a wild month in the U.S. stock market as investors got a sour, albeit brief, taste of the second Nasdaq Composite bear market in just two years.
Electric car stocks and electric vehicle (EV) charging stocks have rebounded off the lows but are still down huge off their highs. Yet just because a stock is down doesn't necessarily make it cheap.
Let's look at some of the most well-known EV automakers and charging stocks -- such as Rivian Automotive (RIVN -2.21%) and ChargePoint Holdings (CHPT -3.73%) -- to determine a good way to approach the industry right now.
Image source: Rivian Automotive.
Why are EV stocks down?
The EV industry -- and the internal combustion engine (ICE) legacy auto industry for that matter -- has been dealing with a slew of supply chain challenges for over a year. But so far, many companies have been successful in raising prices.
Kelley Blue Book reports that the average new car price rose by 14% between December 2020 and December 2021 to an average transaction price of $47,077.
However, the issue now is that many companies are trying to secure batteries and chips in addition to basic parts and components as they look to divest away from ICEs toward EVs. Virtually every legacy automaker, from Ford Motor Company (F 0.08%) and General Motors (GM -0.04%) to Toyota and Volkswagen, has set ambitious EV goals. Higher demand makes it harder for pure-play EV newcomers like Rivian and Lucid Group (LCID 1.19%) to procure the necessary parts and get vehicles off the assembly line and into customers' hands. Unlike their legacy peers, these newcomers lack the sophisticated supply chain networks, and in many cases, the business relationships and connections needed to navigate a global shortage.
It's hard for a new and unproven automaker to attract customers, much less produce and deliver their vehicles, under normal circumstances. Throw in the challenges mentioned, and that task becomes even more daunting.
As a result, many companies, including Rivian and Lucid, have slashed their 2022 production targets. Rivian said it could have produced 50,000 vehicles this year but expects to only produce 25,000 units because of supply chain challenges. Lucid reduced its 2022 delivery guidance from 20,000 units to a range of 12,000 to 14,000 units.
In sum, the entire industry is digging in for a very challenging 2022, although many companies estimate that the second half of this year will be a lot easier than the first half.
Lofty valuations
Aside from Ford and GM, all of the pure-play EV automaker and charging stocks are incredibly expensive according to traditional financial metrics.
Data by YCharts.
Lucid, Rivian, EVgo, and Volta have negligible sales. The least expensive stocks from a price-to-sales (P/S) vantage point are the Chinese automakers, Nio (NIO 3.49%) and XPeng (XPEV -1.39%). Those companies have their fair share of challenges, but they are further along the production runway than many U.S. companies. However, the risk of Chinese companies delisting from U.S. exchanges adds an additional layer of uncertainty over Nio and XPeng.
Despite how expensive these companies look on paper, you could argue that some of them could grow into their valuations over time. Many of these companies are little more than start-ups and need several years to reach profitability. If that happens, then P/S ratios would quickly compress.
The case for a basket of EV automakers
Given the industry sell-off, the case for buying a basket of EV automakers could be as simple as believing in increased EV adoption. Ford and GM benefit from profitable existing businesses that can pass along extra cash flow to fund EV investment. Lucid and Rivian have incredibly impressive technology and high demand for their vehicles.
Nio and XPeng have already produced and delivered a significant amount of vehicles, with Nio passing the 100,000 production threshold in April 2021 and XPeng following suit in October 2021.
The EV charging landscape is a little less competitive in my opinion. ChargePoint sticks out as having the best management, incredible growth numbers, and a winning strategy for capturing market share and growing the business over time. ChargePoint grew revenue by 65% in fiscal 2022 and is guiding for 96% year-over-year revenue growth in fiscal 2023. It also anticipates it will achieve operating cash flow breakeven in fiscal 2025. Unlike the automakers, ChargePoint can succeed with the general tailwinds of the EV industry and doesn't actually care which automakers come out on top so long as the demand for charging grows.
High risk for potentially high reward
The EV industry is bursting with potential -- but it also has its fair share of risk. For that reason, some investors may prefer to wait a few years for some of these prospective companies to mature. As for folks with higher risk tolerance, adding multiple companies to a diversified EV basket is one of the best ways to limit downside risk in case it doesn't work out for a few of these businesses.
