Investors have to walk a fine line between seeing an explosive new market coming and making the right investments at the right valuations to take advantage of it. There's little argument that the global market for electric vehicles (EVs) is in the early stages of breaking out.
Global EV sales doubled in 2021 versus 2020. And it's growing beyond a niche product. Almost 10% of global car sales last year were electric. That's quadruple the market share EVs held in 2019. Many investors saw that coming and pumped stocks in the EV sector to unsustainable valuations. Many of those bubbles have burst as the hype got ahead of the underlying business results. The real question now is whether EV stocks are still overhyped.
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Market expectations grow
Even as stock valuations of EV manufacturers have plunged, expectations for the size of the market have continued to expand. The International Energy Agency (IEA) released its 2022 Global EV Outlook in May. After global EV sales beat its estimates in 2021, the agency updated its predictions for existing vehicle stock over the rest of the decade. The estimates show a meaningful increase in electric personal light-duty vehicles, which includes battery electric and plug-in hybrid EVs.
*2022 report includes actual result for 2021. Data source: International Energy Agency Global EV Outlook reports. Chart by author.
Consumer spending for EVs doubled year over year in 2021 to nearly $250 billion. That's about eight times as much as was spent in 2017. Government spending, through subsidies and tax breaks, also doubled to almost $30 billion. The net result, however, was that the government contributions represented about 10% of total spending, down from about 20% five years ago. That indicates that consumers and EV makers are becoming less reliant on government support.
Supply (and profits) will grow
Sector leader Tesla (TSLA -3.48%) supplied almost 1 million vehicles to that market last year. This year, the company has also opened its two new factories. But there will need to be plenty of other suppliers to the market if it continues to grow at its recent rate.
There will need to be many more suppliers beside Tesla if the EV market grows as expected in even the next five years.
Global sales grew 75% in the first quarter of 2022 versus the prior-year period. China led that with sales more than doubling, which accounted for most of the global growth. But similar to Tesla's share price retrenchment, Chinese EV stocks Nio and XPeng have dropped about 38% and 50%, respectively, thus far in 2022.
One also shouldn't forget, though, that while sales are booming and expected to continue to grow sharply, so is the competition. The above Chinese names, for example, aren't just competing with each other and Tesla. Ford launched its electric Mustang Mach-E in China late last year.
And the company's electric version of its best-selling F-150 pickup truck has recently begun deliveries. Ford said it sold more than 6,250 battery electric vehicles in the U.S. in May. For perspective, Nio, which has been selling its EV products for four years, sold just over 7,000 vehicles in May. Add in the upcoming EV offerings from other major auto manufacturers including General Motors, Chrysler parent Stellantis and Volkswagen, and competition growth in the sector will grow exponentially in the coming years.
After the correction
There's no doubt share prices and valuations got ahead of themselves, and some of that has corrected. EV start-up Rivian Automotive had a valuation exceeding $150 billion shortly after its public debut. At the time, its CEO RJ Scaringe said he expected his company to have the capacity to produce 1 million vehicles annually by 2030.
While it is battling short-term challenges, the company does still expect to be more than halfway there by 2025 with its existing plant in Illinois and plans in place for a second in Georgia, when both are running at full capacity.
Ramping up will take years, as it did for Tesla. But an investment in Tesla in 2014 when it was producing the same volume that Rivian expects this year has gained 1,500%. For investors, while there still may be too much hype in many EV stocks, even a small investment could make a difference for those that succeed. It's just important not to overallocate.
