"Undervalued" and "electric vehicle makers" are terms that typically don't belong in the same sentence. Even if the shares of electric vehicle (EV) stocks are down relative to their recent highs, that doesn't always make them cheap or undervalued.
At the same time, just because an EV company has an elevated stock price doesn't mean its overvalued, either. Tesla (TSLA 4.72%) is one that comes to mind where analysts were saying its $700 share price (at the time) was about $550 too high. Today it's trading north of $1,000 again, and the EV maker is starting to speed up its motor again.
That's why smart investors need to look under the hood of EV stocks, with the pair of automakers below neatly fitting into the buy-and-hold portion of your portfolio.
Ford (F 6.24%) checks the boxes of being an EV stock and undervalued, but one trading at a massive discount. At just 3 times trailing earnings, a fraction of its sales, an even smaller ratio to its projected earnings growth rate, and just 7 times the free cash flow it produces, the Blue Oval has all the hallmarks of a bargain-basement stock.
The reasons for such a cheap valuation are rampant inflation, rising interest rates, and a persistent supply chain crisis leading to parts shortages. With computer chips in short supply, Ford and other carmakers are throwing up their hands and shipping cars to dealers that don't have non-safety-related chips installed. They're promising to install them within a year as the supply chain issues hopefully improve.
While it speaks to the fear that vehicle sales will be even lower than last year, it also offers promise. Because demand is so high for cars, prices are soaring, and though that could result in sticker shock, demand hasn't abated as yet, and it's causing a similar spike in used car prices.
Ford is pushing forward, announcing plans to produce over 2 million EVs (about one-third of its total auto sales) so that it can generate a 10% adjusted operating profit margin by 2026. It's a major undertaking (it sold just 64,000 of the all-electric Mustang Mach-E worldwide in 2021), yet the restructuring plan recently revealed would put it on par with General Motors, which wants to produce 2 million EVs as well, but achieve margins of 12% to 14% by 2030.
Ford's EV sales are growing at a faster rate than both the entire EV industry and its own sales last year. Sales of the Mustang Mach-E are also up from 2021, and it has two new EVs coming out: the F-150 Lightning pickup and the Transit Pro commercial van, which it just began selling. With the ability to produce 600,000 battery EVs globally by late 2023, Ford's discounted stock makes it an undervalued play that will pay off in the years to come.
With China promising to end the regulatory war it's been waging on domestic tech and other fast-growing companies, one of the risks surrounding investing in Chinese stocks is seemingly diminishing. Even so, as the threat of a U.S. delisting grew, Nio (NYSE: NIO) listed its shares in Hong Kong, giving it a new avenue of opportunity.
The war in Ukraine and China's allying itself with Russia does present a new risk, but EV maker Nio ought to navigate the waters, making its shares attractive to investors.
Nio's promise is that it will deliver the new-energy vehicles Beijing wants, and though deliveries are up year over year (they hit 6,131 in February, a 10% increase over 2021), they continue to decline sequentially, which has weighed on its stock. It shows that even Nio is subject to the same supply chain problems plaguing the rest of the industry. But like Ford, it is ready to hit the ground running when the shortages and delays sort themselves out.
An existing manufacturing plant was recently upgraded, and a second one is scheduled to be brought on line later this year. It will also be in five additional countries as it continues to expand the markets it operates in.
Nio is sticking with its plans to launch three EVs this year, but what many view as its most promising venture is its batteries-as-a-service subscription program that allows customers to upgrade or swap out their EV batteries. The potential for lucrative streams of recurring revenue could provide Nio with a modified version of a razor-and-blades business model. It can keep the price of its vehicles affordable (it has refused to raise prices, while Tesla chose to increase them), but make it up on the back end through a more profitable subscription service.
Nio's stock has bounced off its recent lows, but remains more than 60% below the highs it reached last year. Selling EVs into the biggest market and expanding globally make it a good long-term play for investors that can be bought at a price that hasn't been seen since 2020.