The electric vehicle (EV) industry is an integral part of the energy transition. And while long-term emissions reduction targets haven't changed, investor enthusiasm for EV stocks certainly has.
Aside from Tesla, many pure-play electric car companies are still unprofitable and will likely rely on credits to reach profitability. Even legacy automakers investing in EVs are struggling to make the investments pay off. Ford, for example, saw a rise in EV sales but also larger losses from EVs.
Investors interested in electric car stocks should understand the risks and volatility that come with the industry. But for those with a high risk tolerance and a long-term time horizon, that volatility could be well worth it over time.
Here's why ON Semiconductor (ON 2.53%), Albemarle (ALB 1.65%), and Magna International (MGA 0.86%) stand out as three top stocks to buy now.
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ON Semiconductor still has excellent growth prospects
Lee Samaha (ON Semiconductor): I think the recent dramatic sell-off in ON Semiconductor is a buying opportunity. The economy is slowing as relatively high interest rates are starting to bite into consumer discretionary spending. That's bad news for interest rate-sensitive areas, like housing and automotive.
As such, it's completely understandable that ON Semicinductor's CEO Hassane El-Khoury took a "cautious approach" to fourth-quarter guidance when he spoke on the recent third-quarter earnings call. He also said, "We are starting to see pockets of softness with Tier 1 customers in Europe working through their inventory and increasing risk to automotive demand due to high interest rates."
The company offers sensors and intelligent power solutions to various industries, but management focuses on growing in two key end markets: industrial and automotive. Within automotive, it has a major growth opportunity in EVs as they tend to generate significantly more revenue per vehicle for ON Semiconductor than traditional internal combustion engine (ICE) vehicles do.
Unfortunately, the softening automotive end market is causing a reset of expectations for earnings this year, leading to a significant slump in the share price. That said, it's a question of when, not if, EV manufacturers start to increase production aggressively again. When they do, ON Semiconductor will be ideally placed to benefit.
EVs and hybrids are the growth area of the light vehicle market, and any automaker that falls behind in development will find it hard to rely on its legacy ICE models to grow sales significantly. ON Semiconductor's best days lie ahead.
The long-term tailwinds for the lithium industry are too good to ignore
Daniel Foelber (Albemarle): Lithium miners like Albemarle provide an easy way to bet on the growth of the EV industry without having to choose an automaker. Unlike other aspects of the EV industry, such as charging and infrastructure companies, Albemarle is already a thriving and profitable business.
Lithium demand is expected to rise as battery production grows. So why is the stock down over 60% from its all-time high? The answer is probably related to the stock's epic 196.9% run from 2020 to the end of 2022. It's also because the EV industry, at least in the near term, is under pressure from slowing demand and higher interest rates.
But if you looked at Albemarle's results, you wouldn't know that the EV industry is in a bit of a cyclical slowdown. Revenue and net income are at all-time highs. And Albemarle's operating margin, especially for a miner, is extremely healthy.
ALB Revenue (TTM) data by YCharts. TTM = trailing 12 months.
Albemarle reported Q3 earnings on Nov. 1 and cut its full-year revenue, earnings, and cash from operations guidance. However, it is still projecting a 20% to 30% compound annual growth rate on lithium sales volume between 2023 and 2027.
The bearish take on Albemarle is that it is getting ahead of itself and won't hit its projections because they are based on a booming EV market that we simply aren't seeing right now. And, at least for now, the bearish take looks justified, considering the company just cut its 2023 sales guidance by 12% at the midpoint and its earnings guidance by 17.5% at the midpoint.
Albemarle could prove to be a volatile stock for quite some time. But nothing has changed about its long-term investment thesis. And for that reason, buying the dip on the stock as a catch-all way to invest in growing lithium-ion battery demand could be a smart move.
Power your portfolio with Magna International
Scott Levine (Magna International): While there are always the usual suspects for EV enthusiasts to consider, Magna International is a stock that's considerably less familiar than the likes of Tesla and its brethren. A global leader among automotive suppliers, Magna is putting the pedal to the metal in its efforts to prosper from the rising popularity of EVs on the world's highways and byways, making it a worthy consideration for those looking to charge their portfolios with EV exposure.
From plug-in hybrids to fully electric vehicles, Magna provides parts for a variety of electrified vehicles. For example, Magna is a supplier of battery enclosures for Ford's popular F-150 Lightning, and it's providing BMW Group and Stellantis with new dual-clutch transmissions for hybrid vehicles.
In addition to legacy automakers, Magna is helping power new EV kids on the block, like Fisker, as well. According to Fisker, manufacturing partner Magna will help it produce 300 vehicles daily -- an important achievement for the EV upstart.
Although auto companies have hit some potholes thanks to the recent United Auto Workers strikes, Magna's robust business is showing resilience. In the company's third-quarter 2023 financial results report, Magna raised its 2023 forecast. Whereas Magna had projected 2023 revenue of $41.9 billion to $43.5 billion in August, it now expects to book sales of $42.1 billion to $43.1 billion.
Toward the bottom of the income statement, Magna also expects better results. Management now forecasts adjusted net income of $1.55 billion to $1.65 billion -- higher than the $1.4 billion to $1.6 billion originally forecasted.
