Wall Street is always looking for its next-big-thing investment. While artificial intelligence (AI) is currently garnering a lot of attention, it's electric vehicles (EVs) that may have the more impressive runway.
According to estimates from Beyond Market Insights, the global EV market is expected to grow by a compound annual rate of 22.5% between 2022 and 2030. Meanwhile, the International Energy Agency expects that, by 2030, EVs will represent more than 60% of vehicles sold globally. In other words, EVs are about as surefire a growth opportunity as it gets.
The big question is this: Which companies are poised to benefit? Wall Street analysts and pundits believe they have the answer. Based on the non-time-specific price targets offered by three analysts/pundits, the following three EV stocks offer 176% to 705% upside.
Two Rivian R1Ts climbing a hill. Image source: Rivian Automotive.
Rivian Automotive: Implied upside of 363%
The first EV stock at least one Wall Street analyst believes will hit the proverbial gas and rocket higher is Rivian Automotive (RIVN -4.13%). Rivian, which was, arguably, the hottest initial public offering (IPO) of 2021, is expected to run to $63 per share, according to Piper Sandler analyst Alexander Potter. Keep in mind that Piper Sandler was a co-manager of Rivian's IPO, so it's possible that could have something to do with its lofty price target.
Rivian actually put itself on EV investors' maps well before it went public in November 2021. In September 2019, it landed a deal with e-commerce behemoth Amazon (AMZN -3.05%) to deliver 100,000 electric delivery vans (EDVs) by 2030. While Amazon has, at times, more operating cash flow than it knows what to do with, it wouldn't have placed an order for 100,000 EDVs without doing its homework. Choosing Rivian instantly validated the company as a potential long-term winner in the EV space.
What can help Rivian stand out with John and Jane Q consumers? Answer: its R1T electric pickup truck. Although Ford Motor Company and General Motors are moving forward with EV versions of their top-selling, heavy-duty trucks, the Rivian R1T is in a class of its own. It's effectively a luxury pickup that's fully capable of going off-road. With minimal competition in the luxury category, the R1T has a chance to be a real winner.
But it's not all peaches and cream for Rivian (or its peers). Although it closed out 2022 with approximately $12 billion in cash, cash equivalents, and restricted cash, Rivian is burning through its capital at an extraordinary pace. It's spending $5 billion to build a manufacturing plant in Georgia that's set to come online next year. Also, the company is losing, on average, more than $1 billion per quarter on an operating basis as it ramps up production.
To make matters worse, Rivian has been bitten by the recall bug. Four weeks ago, the company announced that it would recall 12,700 of its R1T pickups and R1S SUVs for a faulty airbag sensor. Last October, the company recalled more than 12,000 of its vehicles to address a loose fastener. While recalls are something all automakers deal with, it's terrible timing for Rivian.
Unless the company significantly reduces its cash burn and successfully overcomes recent supply chain challenges, a $63 price target is likely out of reach.
Nio: Implied upside of 176%
A second electric vehicle stock with phenomenal future upside is China-based Nio (NIO -1.21%). Analyst Vijay Rakesh of Mizuho foresees shares of the fast-growing Chinese automaker hitting $25. If accurate, this would work out to a gain of 176%.
One reason for the excitement surrounding Nio is its location. China is the largest auto market in the world, and EV market share is very much up for grabs. With China abandoning its zero-COVID mitigation strategy in December, a reopened economy bodes well for future EV demand.
However, it's Nio's various forms of innovation that do most of the talking. The company introduces at least one new model every year. The two sedans it brought to showrooms last year, the ET7 and ET5, have been very well received and are accounting for more than half of all monthly deliveries.
To add to this point, Nio's vehicles tend to target middle-to-upper-income consumers. People with higher incomes are usually less prone to alter their buying habits when the Chinese economy experiences "hiccups."
What's more, Nio's battery-as-a-service (BaaS) subscription, which was introduced in August 2020, has been a big hit. BaaS allows EV buyers to charge, swap, and upgrade their batteries, as well as receive a discount on the initial purchase price of their vehicle. In return, Nio receives high-margin, recurring subscription revenue and locks its buyers into the brand for (hopefully) a long time to come.
But achieving a $25 price target won't be without its challenges. Supply chain issues throughout China have constrained Nio's production expansion efforts. While management believes up to 250,000 EVs can be delivered this year, the company looks to be on track for around (or possibly even less than) 40,000 EV deliveries in the first quarter, which works out to a 160,000 EV annual run rate.
It could also be difficult for Nio shares to nearly triple if profitability remains elusive. Using generally accepted accounting principles (GAAP), Nio produced a net loss of $2.09 billion last year. Though a reopened China should help reduce this loss, weak stock market sentiment isn't doing Nio any favors.
The Model 3 is Tesla's flagship sedan. Image source: Tesla.
Tesla: Implied upside of 705%
But the EV stock with the most tantalizing upside is none other than North America's largest EV producer, Tesla (TSLA 1.56%). The CEO and CIO of Ark Invest, Cathie Wood, has made a case for Tesla hitting $4,600 (note, this was prior to the company's 3-for-1 split last August). On a split-adjusted basis, Wood's $1,533.33 price target for Tesla implies more than 700% upside in the years to come.
The two key selling points with Tesla are the company's scale and operating performance. In terms of scale, Tesla delivered 1.31 million EVs in 2022 and produced 1.37 million vehicles. With activity ramping up at the Berlin, Germany and Austin, Texas gigafactories, the expectation is for at least 1.8 million EVs produced this year.
The other differentiating factor for Tesla is its profitability. Tesla has delivered three consecutive years of GAAP profits and is no longer reliant on selling renewable energy credits to other automakers to achieve profitability. Although EVs are one of the fastest growth opportunities of the decade, the EV divisions of new and legacy automakers are almost all losing money. In short, Tesla has shown that, thus far, its operating model works.
However, achieving a $1,500-plus price target is highly unlikely for a variety of reasons.
To begin with, Tesla's first-mover advantages appear to be waning. The company reduced the price of its flagship Model 3 sedan and Model Y SUV in the U.S. and China in recent months. Although Tesla bulls would attribute this price cut to the company becoming more efficient at producing vehicles, the writing is on the wall that increasing competition and rising inventory levels are to blame.
Another substantial headwind is that it's just a car company. All of Tesla's ancillary operations, including its solar/energy and services operations, produce low margins and are losing money once below-the-line expenses are factored in. Tesla's profitability is entirely dependent on selling and leasing EVs. Whereas auto stocks often trade at 6 to 8 times earnings, Tesla is priced at 49 times Wall Street's forecast earnings per share for 2023.
Yet the biggest issue that could keep Tesla from getting anywhere near Cathie Wood's price target is CEO Elon Musk. Musk may be a visionary, but he's also a huge liability for the company. He's been a magnet for securities regulators on more than one occasion and has made a laundry list of promises that have gone unfulfilled. Many of these promises are already baked into Tesla's share price, which leaves little room for error.
