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Investing in Electric Car Stocks

Updated: Dec. 28, 2021, 5 p.m.

Electric cars -- often referred to as “EVs,” short for electric vehicles -- are automobiles with electricity-powered engines rather than gas-powered ones. EVs don't require any fuel such as gasoline or diesel.

Electric car stocks are those of companies that focus primarily on manufacturing EVs. In addition, companies that manufacture the components used in electric cars -- like batteries or autonomous vehicle systems -- can also be considered as part of the electric vehicle industry.

Even though all the major car companies, including Ford (NYSE:F) and General Motors (NYSE:GM), are developing and/or manufacturing at least one model of electric vehicle, they’re not usually considered electric car companies because their primary products aren’t electric. The best electric car company stocks are generally those of companies that are already producing and selling electric cars rather than just planning to do so in the future.

Electric car stocks on the map

Company Headquarters Notable Models
Tesla (NASDAQ:TSLA) Palo Alto, California Model 3 and Model S sedans, Model X and Model Y crossovers
NIO (NYSE:NIO) Shanghai, China ES8 and ES6 SUVs, EC6 crossover
Nikola (NASDAQ:NKLA) Phoenix, Arizona Nikola Tre Semi

Source: company websites

1. Tesla: The industry leader

Any list of electric car stocks needs to include the great-granddaddy of them all, Tesla (NASDAQ:TSLA).

Elon Musk’s electric car company had a banner year in 2020. Tesla delivered just under 500,000 vehicles, with 180,000 of them delivered in the fourth quarter alone. Most of those vehicles were Model 3 sedans and Model Y crossover SUVs. The company is building two new gigafactories -- basically giant factories -- in Berlin and Austin.

Tesla has been producing a streak of quarterly net profits, thanks to robust vehicle sales and a windfall from sales of regulatory emissions credits. On Aug. 31, 2020, Tesla’s stock split 5 for 1, and, on Dec. 21, 2020, the company was added to the S&P 500 (SNPINDEX:^GSPC).

The company’s success has contributed to an epic increase in its stock price, making Tesla the most valuable car company in the world. In 2020, Tesla's stock price increased by more than 750%, raising questions about the company’s lofty valuation.

Supply chain issues are affecting all automakers, and Tesla is not immune. The company was recently forced to delay its Cybertruck to 2022 and its new Roadster to 2023. Tesla may find it difficult to keep up its impressive growth rate if the supply chain doesn’t cooperate.

2. NIO: A Chinese SUV specialist

Chinese electric car maker NIO (NYSE:NIO) has been publicly traded since September 2018, but several initial public offerings (IPOs) by other Chinese electric car makers -- such as Li Automotive (NASDAQ:LI) and Xpeng (NYSE:XPEV) -- have increased investor interest in NIO.

In the first quarter of 2021, NIO delivered just over 20,000 vehicles, representing a more than 400% increase year over year. Deliveries came in just under 22,000 in the second quarter, and the company expects to deliver as many as 23,500 vehicles in the third quarter. NIO was forced to reduce that third-quarter estimate from 25,000 vehicles due to supply chain constraints.

NIO is focusing on the Chinese electric SUV market and competing with Tesla’s Model Y crossover SUV. In China, the company has been able to undercut Tesla on price because its vehicles are eligible for Chinese government subsidies, unlike EVs made by Tesla.

3. Nikola: The Tesla killer that wasn’t

Trevor Milton founded Nikola to manufacture both pure electric and hydrogen-electric trucks. Aside from naming his company after Nikola Tesla, Milton has generated controversy by feuding directly with Elon Musk on Twitter (NYSE:TWTR). Nikola has also been in the news because it went public by merging with a special purpose acquisition company (SPAC). The company began taking early pre-orders for its Badger pickup despite not expecting to begin production until late 2022.

Milton stepped down in September 2020 after a short-seller’s report accused him and the company of fraud. The company put on hold and eventually canceled a much-anticipated partnership with General Motors (NYSE:GM), and it also had to cancel a partnership with waste hauler Republic Services (NYSE:RSG) to develop fuel-cell-powered garbage trucks. Nikola eventually announced it would not produce the Badger pickup and returned all deposits. The company's stock price, which was above $80 at its peak, declined to below $20.

Milton was charged with securities and wire fraud in July 2021 for repeatedly making false and misleading claims about Nikola’s products and technology. Nikola itself has not been charged, but the company is certainly tainted by Milton’s alleged actions.

Nikola clearly isn’t a good company in which to invest, but it provides an excellent example of how investing in EV companies can be risky. Startups can have no manufacturing history and limited financial and technical data available. As a testament to the frothy valuations currently being assigned to electric car companies, Nikola has no meaningful revenue but still is worth about $4 billion.

Other electric car technology stocks

You can also consider the stocks of electric vehicle makers such as Lordstown Motors (NASDAQ:RIDE), which produces electric pickups, and electric delivery van manufacturer Workhorse (NASDAQ:WKHS). However, both companies are dealing with some issues.

Lordstown warned in June that it didn’t have enough cash to begin commercial production of its Endurance truck, which is an about-face from what the company had said a few months earlier. Meanwhile, Workhorse is actively being probed by the U.S. Securities and Exchange Commission.

If you want to diversify your portfolio exposure to the EV sector and stay away from controversy, an alternative is to buy stocks in any of these companies:

Yet another option is to buy shares of Lucid Group (NASDAQ:LCID), which recently went public via a SPAC merger. Lucid is valued around $30 billion despite never selling a single vehicle. The company expects to begin deliveries on its Lucid Air EV before the end of the year. However, Lucid is a highly speculative investment, and it will only work out if the company quickly ramps up sales in the coming years.

Electric car recharging.

Source: Getty Images

Electric car ETFs

Investors seeking portfolio exposure to the electric car market who don't want to select individual stocks can buy shares in exchange-traded funds (ETFs). There are plenty of options when it comes to electric vehicle ETFs, although none are pure-play investments in EVs.

The Invesco PowerShares WilderHill Clean Energy ETF (NYSEMKT:PBW), which tracks the performance of the WilderHill Clean Energy Index (NYSE:^ECO), invests broadly in clean energy. While no company's stock comprises more than 10% of the fund’s holdings, this ETF owns the stocks of plenty of electric carmakers. The stocks of NIO, Tesla, Workhorse Group, Kandi Technologies (NASDAQ:KNDI), and ElectraMeccanica Vehicles (NASDAQ:SOLO) are all held by this ETF. The fund also owns shares of Blink Charging, lithium-ion battery maker Livent (NYSE:LTHM), and Plug Power (NASDAQ:PLUG), among several hydrogen fuel cell companies.

The Global X Autonomous & Electric Vehicles ETF (NYSEMKT:DRIV), as its name implies, invests in makers of electric and self-driving cars. But the fund focuses mostly on traditional automakers, such as Toyota (NYSE:TM), that are making forays into this space, along with large tech companies, including Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), that are developing autonomous vehicles.

What makes the electric car industry different?

The electric car industry differs from the traditional automotive industry because it is so new. Until recently, very few companies manufactured any kind of electric vehicle, but now every major automaker in the world is developing or producing an EV.

Because major interest in EVs is so recent, the only established industry leader is Tesla. Startup EV makers can compete fairly well with traditional automakers for EV market share, making it difficult to discern which companies will ultimately dominate the electric car market. That unpredictability makes investing in the electric car industry more risky than adding portfolio exposure to the automotive industry as a whole.

The future of the electric car industry

The electric vehicle sector is poised to benefit under the Biden administration. One Biden priority is a major infrastructure bill, which has been passed by the Senate but awaits approval by the House. The Senate bill includes $7.5 billion for EV charging stations, $5 billion for zero-emission buses, and $2.5 billion for electric ferries, although it dropped some items such as EV tax credits that were present in earlier versions of the bill.

Many companies participating in the EV sector are going public, while legacy automakers plan to release a plethora of electric vehicles over the next five years. Investing in this highly competitive, fast-growing industry is likely to be profitable, but it's important to take steps to minimize your investment risk. Don't invest in just one electric car company, but rather hold positions in several companies of various sizes, and consider buying shares in an ETF.

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