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Investing in Electric Car Stocks

Updated: May 11, 2021, 6:42 p.m.

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

Electric car stocks are those of companies that focus primarily on manufacturing electric cars. 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 as 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 simply 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 electric car 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 sales of vehicles 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 the price of the stock, 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. Tesla is also experiencing some challenges in China, a key growth market, where the company faced online backlash and issued a public apology for how it handled a protest at the Auto Shanghai expo.

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. NIO has already delivered about 95,000 vehicles in total.

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 the company's vehicles are eligible for Chinese government subsidies, unlike cars 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 been in the news, too, because it became a public company 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 the company and Milton of fraud. The company put on hold and eventually cancelled 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.

Nikola clearly isn’t a good company in which to invest, but it provides an excellent example of how investing in electric vehicle companies can be risky. EV companies that are startups can have no manufacturing histories and limited financial and technical data available. And, 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 is not troubled like Nikola, and electric delivery van manufacturer Workhorse (NASDAQ: WKHS). But if you want to diversify your portfolio exposure to the EV sector, another alternative is to buy the stocks of any of these companies:

If you want to invest in a SPAC, you can buy shares of Churchill Capital (NYSE: CCIV), which has agreed to merge with Lucid Motors, an electric car maker. Although still a pre-revenue company, Lucid is expecting to generate $23 billion of annual revenue in 2026. Obviously, take that projection with an electric truckload of salt.

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). Many ETFs provide exposure to the EV sector, 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, 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), 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, only 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 car sector is poised to benefit under the Biden administration. The president's proposed infrastructure and jobs plan, valued at $2 trillion, allocates $174 billion to expenditures related to EVs. A reported $100 billion is designated for rebates on electric car purchases, and $15 billion is for building electric vehicle charging stations.

Many companies participating in the EV sector are going public, while legacy automakers will 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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