Investors fell in love with electric vehicle (EV) stocks in 2020 and 2021. Driven by the boom in Tesla's (TSLA +3.93%) stock to a market cap of over $1 trillion and the capital being thrown around with the special purpose acquisition company (SPAC) bubble, a flood of electric vehicle stocks went public. Due to investor excitement, many stock prices soared, but they have since fallen dramatically in the current bear market. For example, Rivian Automotive went public at a $100 billion valuation with zero revenue. The stock is now down 69% year to date in 2022.
This broad drawdown could provide an opportunity for long-term investors. Is now the time to buy the dip in electric vehicle stocks? Let's investigate.
Severe drawdowns for many companies
The sell-off in EV stocks has been brutal this year. Rivian is down 69%, Lucid Group is down 60%, and Lordstown Motors is down 41%. All three of these stocks are EV start-ups that have gone public in the last few years. Even companies associated with EVs but not directly manufacturing them have gotten hit by this drawdown.
QuantumScape -- a company working on solid-state batteries for EVs -- is down 55% year to date. Charging station company ChargePoint Holdings is down 24%. All of these stocks are underperforming the S&P 500 this year, which is only down 18% year to date. Clearly, the bullish enthusiasm investors had for EV stocks in 2020 and early 2021 has turned into bearish pessimism in 2022.
These drawdowns could provide buying opportunities for patient investors who have waited on the sidelines, because the EV industry is projected to become a massive part of the global economy this decade.
The industry is going to be massive
There's a reason investors got so bulled up about the EV market last year, and that is because the financial opportunity is ginormous. Automotive analysts expect battery-powered EVs to become a big chunk of the automotive market by the end of this decade, hitting an estimated $823 billion in annual revenue across the world. With the global automotive market estimated to be $2.86 trillion, EVs look set to slowly take over the transportation industry within the next 10-15 years.
This tailwind should provide a sizable opportunity for all of these EV stocks, whether they are directly selling cars or selling products associated with the industry like charging stations or batteries. First-mover Tesla has already proven there is a ton of demand from consumers, with the business on a trajectory to hit $100 billion in annual revenue sometime within the next few years. This is a huge opportunity for companies to go after as they bring EVs to market.
NASDAQ: TSLA
Key Data Points
Look at legacy automotive companies
Investors interested in EV stocks can look at legacy automotive companies as a general proxy for how these stocks should trade at maturity. These are car companies at the end of the day, things that we have been manufacturing for over 100 years. Ford, one of the largest automotive companies in the U.S., has a market cap of $61 billion and $148 billion in trailing annual revenue. That gives the stock a price-to-sales ratio (P/S) of just 0.4.
Why is the P/S so low? Because manufacturing cars is a capital-intensive business with low gross margins, leaving little room for profit and cash flow generation. Investors should expect the same from EV companies. Tesla, for example, trades at a P/S of 13.8, or more than 30 times that of Ford. Rivian, which has barely gotten trucks out of the factory door, has a P/S of 43.8. Yes, these companies might grow quicker than Ford over the next decade, but a lot of that projected growth is already priced in.
F PS Ratio data by YCharts
While the industry tailwind is appealing, these nosebleed valuation multiples -- even after the stock price drops in 2022 -- should have investors nervous about putting their money in EV stocks. Tesla is priced to perfection, and many of these other EV start-ups have barely started delivering vehicles. Plus, the legacy automakers like Ford, Hyundai, and Toyota are investing heavily to build out their own EV product lines, which will add even more competition in coming years.
The EV market is likely going to be massive by 2030. But that doesn't mean you should be investing in EV stocks today.
