Electric vehicle (EV) stocks have emerged as a battleground investment opportunity. Pros include long-term tailwinds that support increased EV demand, sustained tax credits, heavy investment by automakers, and a focus on tackling climate change.
But the cons aren't to be trifled with. Headwinds include a potential recession taking a sledgehammer to consumer confidence and new-car demand. Not to mention a growing list of competition from new and existing automakers.
Tesla (TSLA 1.46%) reigns supreme as the most valuable car company in the world. And many argue that Tesla is more than a car company, given its investments in autonomous driving, artificial intelligence (AI), solar energy, and electrifying other forms of transportation. But Rivian Automotive (RIVN -3.38%), Nio (NIO -0.72%), Lucid Group (LCID -4.31%), and Ford Motor Company (F -2.05%) are all taking strides of their own in the EV industry.
Let's determine if buying Tesla stock or equal parts of a basket of EV stocks right now is better, based on what two fool.com contributors have to say.
Image source: Getty Images.
Tesla aims to stretch its lead
Howard Smith (Tesla): Tesla makes money. Lots of money. The EV leader made $12.6 billion in net income in 2022 while generating $7.6 billion in free cash flow. That cash flow comes even after the company reinvested more than $7 billion in its operations last year.
Those investments will continue in 2023 and beyond. Tesla has already announced plans for its next factory, in Mexico. And it also continues to vertically integrate with battery production and potentially a lithium processing plant at its Texas site.
The success of Tesla's business to date doesn't mean the stock comes without risk. In fact, those who bought Tesla shares 12 months ago are facing negative returns that are trailing the Nasdaq Composite index.
TSLA total return level data by YCharts.
And there is something to be said for diversifying EV investments among other names, including a basket of the other four discussed here. But Tesla is so far ahead of its competition that even its newest factory in Germany could produce more EVs this year than all four of those companies combined.
That factory was recently making vehicles at a rate of 4,000 per week, which should continue to increase. While Nio, Rivian, Lucid, and Ford continue to ramp up production, the four combined produced only about 215,000 EVs in 2022; Nio was responsible for more than half of that count.
While there's no assurance that Tesla will continue to see strong demand for its products, the same could be said for its competitors. But if an investment thesis assumes that EV demand will continue to increase, it makes sense to bet on the proven leader.
Valuation matters
Daniel Foelber (Nio/Rivian/Lucid/Ford): What a difference a few months makes! If the question of whether to buy Tesla or equal parts of a basket of other EV stocks were asked at the end of 2022, I would have said (and did say) Tesla all day long.
That's because Tesla shares closed out 2022 down a staggering 65% for the year. And its valuation metrics -- including price to sales (P/S), price to earnings (P/E), and price to free cash flow (P/FCF) -- were all looking attractive.
Tesla is still a reasonable buy, even after surging in 2023. But it isn't as easy to make the buy case after the stock gained so much ground in such a short time.
The reverse is true for the basket of EV stocks, particularly Rivian and Nio, which have seen their share prices fall even more in 2023 on top of a brutal 2022.
But stock price alone is not a good indicator of valuation. The P/S ratio isn't perfect, but it does shed some light on just how pessimistic investors are about unprofitable EV growth stocks. The sell-off, paired with higher revenue expectations for 2023, has pushed the forward P/S of Rivian down to just 3.1 and Nio down to 1.2 -- which are lower than Tesla's 5.4 P/S ratio.
TSLA PS ratio (forward) data by YCharts.
Ford has a forward P/S ratio of 0.3 -- but that's to be expected because it is a mature business with a huge legacy business making internal combustion trucks, SUVs, and commerical vehicles. Lucid's P/S ratio is the highest but is still down from past levels.
A basket of stocks gives investors a variety of plays in the burgeoning EV space. Rivian is a front-runner in electric pickup trucks and delivery vans, and has an electric SUV. As Howard mentioned, Nio is further along in its development and has grown to become a major player in China across different price points.
Ford is a well-known brand, and its F-150 Lightning electric pickup is directly competing with Rivian, and its Mustaing Mach-E is generating healthy growth numbers. But Ford also has the stability of an established business, so it could be a safer stock for investors who believe in a gradual transition, as well as Ford's ability to succeed in the electric pickup space just as it has with internal combustion engines. Ford also has a sizable 4.8% dividend yield -- which is ideal for passive income.
Diversification is paramount for investing in EV stocks
Besides the sell-off across EV names, remember that the auto industry is capital-intensive, incredibly competitive, and riddled with a history of failed companies. Tesla and BYD (BYDDY 1.23%) are the only automakers that have emerged from unprofitable growth to positive net income and FCF from EVs while sustaining a high operating margin and growth rate.
Including Tesla as the largest holding in a basket of other EV stocks could be the best move to capture a diversified balance of risk and potential reward. But Rivian, Nio, Lucid, and Ford each have their own strengths and might be worth a look, especially now that their valuations have come down.
