The bull market for electric vehicles (EVs) in 2021 wasn’t as clear as the trend in 2020. What started with a global supply shortage in 1Q2021 (which caused most EV deliveries to decline in subsequent quarters) may as well have been the tipping point for the industry as a whole. While most EV delivery figures have already recovered, some companies are still lagging in stock price.
The fate of the EV industry is intertwined with many other sectors such as processors/chips (Intel, AMD) and batteries/raw materials (Freeport-McMoRan, MP Materials). However, in this article, we’ll focus on the carmakers themselves.
It is difficult to pass a blanket statement across EVs in general. So, for this article, I’ll be dividing the EV market into three categories:
- US EVs (with PE) – Eg: Tesla, GM, Ford
- US EVs (without PE) – Eg: Lucid, Lordstown, Workhorse, Rivian, Nikola, Fisker
- China EVs – Eg: Nio, Xpeng, Li
- 1 Bonus EV Company to watch
2021 in a nutshell
There are certain metrics and figures we should consider as we continue to be vested in this industry. While each company may have its own opportunities and challenges, investors should consider the following factors whenever the thought of EV comes to mind:
i) Where are we? – Market Cap & Growth
The global electric vehicle market is anticipated to grow from $287.36 billion in 2021 to $1,318.22 billion in 2028 at a CAGR of 24.3%.
How much is the electric vehicle market worth?
Needless to say, we are looking at an incredibly long time horizon when it comes to electric vehicles. Right now, we are still at its inception.
All charts I’ve come across point towards an industry that steadily shows signs of improvement, from revenue to margins.
Despite all the news we are seeing about how carmakers are beating expectations, bear in mind that in the grand scheme of things, EV sales still only make up, at best, 5% of the global vehicle market cap.
ii) Government Support – Laws, Regulation & Adoption
If there is one consistent thing across the entire EV industry, it would be the degree of government support given to the sector. Regulators are pushing for a “carbon-free” environment in almost every continent. One of the easiest ways to achieve this is to encourage the adoption of EVs.
In most cases, the push for adoption comes in the form of tax rebates. Although other factors such as the availability of charging stations influence the decision of buyers, tax rebates have worked well to ensure a steady stream of early customers in the EV world.
The chart below shows a direct relationship between consumer spending and government spending on EVs.
What’s important to note is that government support will not last forever. We’ve already seen the Chinese government trim their support to this sector (will cover more on this later). As adoption starts to pick up, it is only logical for most governments to follow suit.
The following chart shows the proposed support for EVs in the US. Notice how the support will start to inflect downwards after 2027.
Overview of the US EV Market
The US EV market is incredibly fragmented due to the many ways it can be segmented.
i) By vehicle type
Some may choose to categorize it according to vehicle type. In this case, a company like Workhorse can easily be distinguished from Tesla, as Workhorse produces vans whereas Tesla produces cars.
ii) By product line
Another method of division could be by product line. This refers to the percentage of EVs to traditional vehicles.
In this scenario, companies like Ford and General Motors are distinct from other pure EV companies like Lucid and Nio.
iii) By PE ratio
In my humble opinion, the best method of division is via the PE ratio. It is straightforward, clear, and based on data.
If the PE is negative, it would mean that the company is not earning money from the sale of its products. If it’s positive, it would mean that the company is indeed generating profits from its activities.
It should not be assumed that an EV company with a negative PE is a “bad” company in any way. Still, we should ask, WHY is the company not making money? Is the company not making money because it has no prototype to begin with? Or is there a genuine reason why profits are being suppressed?
US EVs (with PE) – Eg: Tesla, GM, Ford
What are profitable US EV companies?
Under this category of profitable US EV companies, we have companies such as Tesla, GM & Ford.
What distinguishes these companies is that for the whole of 2021, the market can’t seem to get enough of them! Even at the time of writing, all three companies are approaching/breaking their 52-week high.
The outlook for profitability
Now, some may debate that their profits from other business units are helping to cover the losses generated from their EV production. Regardless, these companies are able to make a profit.
In my opinion, investors still want to ride the EV wave; however, they are more comfortable doing so with profitable EV companies. This is because should inflation eat into business margins, the companies in this category would likely still generate a profit. Also, Tesla remains a hot favorite as investors are wondering if they should jump on board.
Therefore, moving into 2022, I think that a pullback to oversold levels will likely happen when tapering hits in March.
However, given the trend, the bull rally is probably still intact for these companies.
US EVs (without PE) – Eg: Lucid, Lordstown, Workhorse, Rivian, Nikola, Fisker, Rivian & IDEX etc.
Under this category of US EV companies, we have companies surrounded by speculation and controversy. Some have been subject to lawsuits, others don’t have a budget to develop a prototype, and some hold a market cap that defies logic.
Probability of stock movement
I’m not here to judge whether these are good or bad stocks. After all, what matters is whether or not they can help you earn money or make you lose it.
Given the strength of the meme rally fueled by retail traders back in 2021, nothing is stopping these stocks from “mooning” overnight.
Should any of them 5x your capital in a day, then hey, I’m happy for you. Nonetheless, it is more likely that these stocks may -5x your capital. I base this prediction on the chart below, which compares the share price of Lordstown Motors, Lucid, Nikola, Workhorse & Fisker.
Though Lucid and Fisker appear to show more strength than the rest, the rally isn’t as clear as that of Ford and General Motors.
Hence, while I tend to accumulate stocks at oversold levels, I’m staying away from most of the stocks in this category. At present, there’s just too much speculation.
Interpretations and predictions
In my opinion, we will likely see some of these stocks gain momentum in 2022, as long as they have legitimate catalysts for growth.
Here are my thoughts on this sector moving into 2022:
- Will likely see a rebound from severely oversold levels, as there is a clear support level forming for the biggest losers.
- As “growth” stocks, it is likely that we will see more weakness in this sector as we go into 1H2022. Do pay attention to FED announcements on tapering.
- I wouldnt’t rule out a short squeeze, but thread carefully. If you want to make a brazen trade, pay attention to the short interest of the companies.
- Companies that have a chance to recover are the ones with an existing prototype or have received orders for delivery of vehicles.
I would refrain from individually recommending any of these companies, but for disclosure, I hold Lucid in my long-term portfolio.
China EV – Eg: Nio, Xpeng, Li, BYD
It has been an incredibly rough year for China EVs as most of them have not seen their all-time highs since 2020. To make matters worse, the Chinese government has begun to cut back on the subsidies for EV buyers.
China will initially cut subsidies by 30% in 2022, with the intention of phasing them out altogether by the end of 2022. China began reducing its subsidies in 2020, with plans to drop them by 10% per year until 2022.
Roadshow by CNET
Is the industry ready to stand on its own?
In my opinion, it does seem a little premature, and I am compelled to think that this is related to the idea of “common prosperity“. However, looking at the chart below, it is clear that even at present levels, EVs are being adopted at a much faster rate in China than the rest of the world.
Understanding the trend
This trend can be attributed to a few factors, with government subsidies being one of them.
Another factor is the developed charging infrastructure in China. There is usually a correlation between the amount of charging infrastructure in a country and its EV adoption rates. In the case of China, it is no surprise that the number of charging points (both private and public) has increased significantly over the past five years.
Thoughts and considerations
With the above in mind, here are my thoughts on the Chinese EV Market in 2022:
- Overall, Chinese EV stocks did not crash as bad as one would think. If you bought any of the above at their all time highs, you’ll be down by about 30-40% at present. As unfortunate as that sounds, it’s not as bad as buying Nikola at $90, which is currently trading at $10.50. That’s a loss of almost 90%!
- Should the reduction in government subsidies impact the sales of these companies, it would be prevalent by their 1H2022 earnings call. We should see bigger moves by then.
- Bear in mind that many of these companies do not have a PE ratio; hence, they are valued based on their price-to-sales ratio. Any changes to their revenue will then infleunce the direction of the share price.
- At present, there are no cataysts that will cause strong moves in the Chinese EV industry. Therefore, it is likely that we will trade sideways during the first quarter.
- Watch out for the goverment completely removing the subsidies and an increase in the charging infrastructure of the companies’ foreign ventures.
Bonus Company: US EVs (with PE) ~ SONY!
As I was completing this article, something interesting popped up on my newsfeed: Sony is entering the EV space!
This is interesting as Sony possesses the capacity to succeed in this industry. Given the EV craze, I am doubtful when a company goes into EV. But with Sony, I really believe they can make it happen! After all, they already have a prototype, and it moves without breaking! After seeing all the listed EV companies that don’t even have a working prototype, this is a great sign.
Sony is now definitely on my watchlist!
Imagine all the proprietary technology in this car? Self-driving/safety capabilities powered by their photography/AI tech? A PlayStation built into the vehicle? The possibilities are truly limitless with this new venture.
EVs are off to an exciting start this 2022!
p.s. if you’re looking for ways to find EV or growth stocks that could be your next multi-bagger, join Alvin in his live webinar to discover how Dr Wealth picks stocks for their portfolio.