Seth Goldstein, Chairman of the Morningstar Electric Vehicle Committee, spends his days analyzing what's under the hood of Tesla's Model 3, China's NIO ES6 SUV, and Ford's new Mustang Mach-E.
That's because currently the best potential stock investment in EVs, which had a weakness in 2019, isn't necessarily the automaker that is managing the capital-intensive move away from gas-powered cars, according to the Wall Street analyst. They are companies that make computer chips, parts that enable electrification, and metals like lithium for longer-lasting batteries, for which he is more optimistic.
"With (EVs) gaining broader acceptance over the next decade or two, I see many good long-term opportunities to own high-quality companies across the EV supply chain," Goldstein told USA TODAY.
When it comes to investing in electric vehicles, there are pure games like the electric vehicle manufacturer Tesla (TSLA). However, there is also an opportunity to invest in semiconductor manufacturers like Nvidia (NVDA), which manufacture chips that act as the brain of the electric vehicle.
Or you could buy shares in Albemarle (ALB), a leading manufacturer of low-cost lithium, a key component in electric vehicle batteries. Or you can invest your money in the diversified auto parts manufacturer BorgWarner (BWA), which benefits from the production of parts for gas engines and the resulting sources of income for components of electric vehicles.
Investors are betting that electric vehicles will become mainstream. The global sales outlook is promising.
According to a Deloitte report, sales of electric vehicles are expected to increase to 4 million by 2020 and to 21 million by 2030. In 2017, it was over 1 million worldwide for the first time and reached 2 million in 2018.
According to Deloitte, EV's share of the entire automotive market (currently around 2%) should grow rapidly and reach 10% by 2024. China is the largest market for electric vehicles with around half of its sales, followed by Europe and the USA.
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A critical change is expected in 2022 when the cost of an electric vehicle will decrease to match the cost of a gas powered car.
"Since operating costs are no longer an obstacle to buying, electric vehicles are becoming a realistic and feasible option for every new car buyer," said Deloitte in conclusion.
Electrification of transport is a trend that does not stop and opens up long-term growth opportunities for investors.
"We are generally quite optimistic about EV technology," said Pawel Wroblewski, an international manager of growth equity funds at ClearBridge Investments. "Electrified cars are a disruptive technology."
According to Asutosh Padhi, senior partner at McKinsey & Co., four trends are driving mass adoption of electric vehicles. "More customers are actually considering electric vehicles," Padhi said in a video on the McKinsey website. Buyers in the United States, Germany, and China are now considering an EV.
The profitability of EV ownership has also improved. McKinsey says battery costs have dropped about 80% since 2010 and are expected to drop another 50% over the next few years. State regulations and guidelines, such as stricter emission and fuel saving targets, favor environmentally friendly electric vehicles.
Finally, the charging infrastructure for cars has improved, although some regions in the United States are ahead of others.
How should someone interested in investing in electric vehicles proceed?
Buy "pure" games like Tesla
Tesla is not without challenges. It has to prove that it can make constant profits, control costs, achieve production and delivery goals, ward off competitors, cope with the recent drop in sales in China and launch new models. The electric car maker, which surprised Wall Street with a profit of 78 cents per share in the third quarter of 2019 compared to an expected loss, remains an industry leader working towards sustainable profitability.
Analyst Sam Korus of ARK Invest, a company that is optimistic about Tesla, says the stock's price will double over the next five years, even taking into account the company's most positive outlook – and could rise to $ 4,000 per share if the ARK bull price is canceled. The shares were trading at over $ 450 on Friday.
According to Korus, Tesla has four competitive advantages. Tesla electric vehicles have a much greater range than competitors when it comes to battery life. The ability to send software updates wirelessly has another advantage. Tesla's self-driving technology also gives it a head start in autonomous car racing, as does the unrivaled collection of driving data from the real world.
ARK believes that Tesla's plan to set up a fully autonomous taxi network will not be implemented, reducing its worldwide market share for electric vehicles from 17% to 6%. In this scenario, the company would sell about 1.7 million to 2 million cars in 2023, so inventory could still double in the next five years, ARK said. The bull case assumes that the forecasts for Tesla's self-driving fleet will change, which would increase Tesla's vehicle sales to around 6 million.
Investors who expect sales to recover in China and sustain long-term growth can consider the Chinese electric car maker NIO, added Wroblewski. Following a decline in sales in 2019, NIO shares are trading well below their 52-week high.
The more technologically advanced cars become, the greater the need for semiconductors. Chips are required for the power supply of EV batteries and drive train components as well as for software and firmware updates. The switch to self-driving cars also increases the demand for chips.
"Chips are like the brains of the vehicle," says Korus.
Chip stocks with EV exposure include analysts Nvidia, Maxim Integrated Products (MXIM), NXP Semiconductors (NXPI) and TE Connectivity (TEL).
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Buy auto parts suppliers
Companies selling EV parts and components will benefit from the mass adoption of electric vehicles and mass sales to buyers of "fleets" like Amazon, analysts say.
Korus owns the auto parts supplier Aptiv (APTV) in its fund. "If you don't have the manufacturing and electric vehicle expertise, you can get the parts you need to make," he says.
Investors looking to hedge their bets should consider BorgWarner. The well-established auto parts maker is a varied way to transition from gas-powered cars to electric vehicles, as it creates revenue streams for both types of vehicles during the multi-year shift to electrified and autonomous transportation, said Morningstar's Goldstein.
Although batteries are the key component that drives electric vehicles on the country's highways, Korus considers battery manufacturers to be less valuable to investors, mainly because batteries quickly become commodities.
Analysts are less optimistic about automakers like Ford, GM, and Volkswagen, which are currently dealing with electric vehicles. The reason: Profits are held back by the high manufacturing costs for electric vehicles compared to gas-powered cars.
The automobile manufacturers are also faced with the balancing act of investing in the future of the electric vehicle and at the same time complying with the increasingly strict exhaust gas standards and official regulations for existing gas-powered vehicles, according to Goldstein.
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