Electric vehicle stocks have taken it on the chin lately, and many investors who were previously bullish on the EV industry are now left wondering whether there's still a good way to benefit from the massive shift to electrified vehicles.
I think there is, but not all EV stocks are going to benefit, and it's going to take some patience to see the eventual payoff.
Here are a few things that are going wrong and a handful of things going right with the EV industry today -- and why there are at least two stocks worth owning.
Image source: Tesla.
The bear case for the EV industry
If you're an EV bear, coming up with a list of reasons to stay away from these stocks right now is pretty easy. Here are just a few:
- Supply chain shortages continue to rattle EV production.
- There's a semiconductor shortage. Yes, still.
- Inflation is running rampant, driving up the costs of materials and vehicles.
- COVID-related lockdowns in China have hampered some EV companies' production.
Need I go on?
EV companies saw their share prices go on a near-euphoric rise in most of 2020 and 2021 as stock market investors practically threw money at anything technology related. A handful of high-profile electric vehicle company IPOs, including Rivian Automotive (RIVN 5.22%) and Lucid Group, helped add to all the excitement.
But all of the aforementioned problems with the EV market have culminated in one massive storm cloud that's rained all over the EV parade. It's been bad, really bad, for EV investors. Tesla's (TSLA -1.65%) share price is down 44% over the past 12 months, Rivian's has plummeted 73%, and Lucid's has dropped 72%.
But here's the thing about storms that's hard to remember when you're in the middle of one: They pass. The rain stops, the clouds part, and the sun comes back out again.
The bull case for EV stocks
Just like with the long list of reasons to be skeptical of EV stocks, there are some very legitimate reasons to be optimistic about this market, too. Here are just a few:
- 60% of all light vehicles (cars, SUVs, pickup trucks) sold worldwide in 2030 are predicted to be EVs -- up from 13% right now.
- The EV industry will be worth an estimated $1.4 trillion by 2027.
- Nearly 60% of Americans said they would consider buying an electric vehicle, up 7% from 2021, according to TrueCar.
In addition to all of this, many governments are now incentivizing consumers to buy electric vehicles to help fight climate change. For example, the Inflation Reduction Act passed by Congress earlier this year included significant incentives for EV purchases -- up to $7,500 toward a new EV purchase and up to $4,000 for used EVs.
Legacy automakers see the writing on the wall and are investing billions of dollars to transition to EVs over the coming years.
The disruption of the automotive industry is causing fears that some automakers will be left behind, but investors should focus on the new opportunities that disruption often creates.
Two good EV stock opportunities
If you're willing to take some risk, I think there are at least two EV stocks worth considering right now: Tesla and Rivian.
Tesla is a leader in the EV space; it got a jump on the market ahead of traditional automakers and is currently the largest electric vehicle producer in the world. There are risks with the company, of course, one of which is CEO Elon Musk's new focus on Twitter.
Additionally, Tesla's stock isn't cheap by any stretch of the imagination. The shares are trading at 60 times the company's forward earnings. But I'd point out that this is much cheaper than the company's price-to-earnings ratio of about 344 just one year ago.
Tesla's EV success is undeniable. In the most recent quarter, the company delivered 343,830 vehicles, up 42% from the year-ago quarter, and it's on track to reach a vehicle production run rate of 2 million this year. The company's growing list of Gigafactories across the globe is helping vehicle production accelerate, and Musk estimates that his company will reach an annual vehicle production of 20 million by 2030.
Profits are also moving in the right direction, with earnings jumping 69% in the most recent quarter (ended on Sept. 30) to $1.05 billion. And Tesla's net profit margin of about 15% is a feat of accomplishment for an automaker.
Investors looking for an attractive pure play in the EV space likely won't find a more successful company right now.
Image source: Rivian.
If your risk tolerance is even higher, Rivian might be worth considering. This is another EV pure play focusing on electric pickup trucks and SUVs.
One thing that sets Rivian apart from its EV start-up rivals is that it already has a significant vehicle order from a large company: Amazon has already nailed Rivian down for an order of 100,000 electric delivery vans.
Rivian is also picking up important partnerships, most recently with Mercedes to share a factory in Europe to split the cost of producing electric vans.
While Rivian's vehicle production has faced some speed bumps, it continues to accelerate. Production was up 67% in the third quarter (ended on Sept. 30), and management reiterated its guidance of delivering 25,000 vehicles for full year 2022.
Additionally, Rivian has plenty of cash on hand to continue building out the company. It ended the third quarter with $13.8 billion in cash, cash equivalents, and restricted cash -- enough to keep things running until 2025, according to management.
Rivian's stock isn't exactly cheap, with the forward price-to-sales ratio sitting at 58 right now. But Rivian is also making significant moves in the EV market that could pay off down the road. If you have a higher risk tolerance, opening a small position today could allow you to tap into Rivian's massive potential.
