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In the old days, releasing a new paint color was about as innovative as the major automakers. The change came slowly.
But 2020 was by far the most groundbreaking time in the auto industry since the days of the Model T: it was the year the United States became involved in electric vehicles.
Last year, Tesla (Nasdaq: TSLA) shares rose more than 700% as the company became the seventh largest in the country. Tesla now has a market cap 9 times that of General Motors (NYSE: GM).
Inspired by Tesla’s success in the market, smaller electric vehicle companies rushed public, and the market was swept up with initial public offerings (IPOs) or special purpose vehicle mergers (SPAC) for EV stocks Fisker (NYSE: FSR), Xpeng (NYSE: XPEV), QuantumScape (NYSE: QS), Canoo (Nasdaq: GOEV), and Hyliion (NYSE: HYLN).
But it wasn’t just startups struggling to make a splash in the room. Last year, CEOs of GM, Volkswagen Group (NYSE: VWAGY), and Ford (NYSE: F) began redoubling their pursuit of market share in electric vehicles – fearing that Tesla was finally big enough to threaten entrenched internal combustion engine technology .
Here’s why EV stocks are out of juice
You will seldom see how so many forces line up as last year. Of course, you’d expect EV stocks to continue their amazing run that began last year … and you’d be largely mistaken.
In fact, all of the electric vehicle and SPAC IPOs just mentioned have fallen this year. Tesla too.
To explain why EV stocks are no longer accelerating, let me introduce a framework called the Gartner Hype Cycle.
Most new technologies follow this path:
- Innovation trigger: An early market leader emerges.
- Expectation peak: Many companies enter the market with the hope of gaining market share.
- Trough of disillusionment: Weaker competitors break out and investor interest is waning.
- Path of Enlightenment: As the technology becomes more widely accepted, industry winners are beginning to emerge.
- Productivity plateau: Mainstream adoption is picking up speed and the industry is beginning to consolidate.
Now, in 2021, we’re seeing a transition from peak of expectation – when almost anyone with a half-baked EV plan could get funding – to lows of disillusionment.
However, as the frame shows, there are still significant benefits to be gained from switching to electric vehicles once we step onto the slope of enlightenment.
With such long-term benefits running across the automotive industry, you don’t have to invest in a risky electric vehicle IPO today to capitalize on the upcoming technological change.
Instead, consider these three value-driven companies that are just as likely to benefit from the growth in electric vehicles.
Magna could land the crown jewel of electric vehicles
- Magna International Inc. (NYSE: MGA)
- Price: $ 77.66 (as of August 19, 2021)
- Market capitalization: 23,323,914,687
Apple’s (NASDAQ: AAPL) “Project Titan” has long been an open secret in tech circles. Here’s what we know: Apple works with more than 1,000 experts to develop an electric vehicle.
A report earlier this year said it was a joint venture between LG and Magna International (NYSE: MGA) could provide the electric powertrain.
Apple wins are always game-changing for suppliers, but Magna is likely to play a bigger role – both as a manufacturer and Fitter. Traditionally, automakers have taken a soup-to-nut approach, which means they design, manufacture, and assemble all of the components of their vehicles.
Increasingly, many EV manufacturers like Fisker are only involved in the development of the product … and Apple is familiar with the pure design approach, using manufacturers like Foxconn from China for iPhone and iPad assembly and manufacturers like TSMC for making chips.
Even if Magna doesn’t win the Apple deal, it should still benefit from the move from internal combustion engines to electric vehicles. The company has a long history of partnering with Ford and General Motors as both assembly partners and component manufacturers, so the rising tide of electric vehicle sales should lift Magna’s boat as well.
Additionally, with capital drying up, many other electric vehicle manufacturers are likely to take a design-only approach and outsource manufacturing to companies like Magna, which have size and track record. As an example, Magna recently signed a contract with Fisker to assemble the company’s Ocean SUV.
Although shares are up nearly 58% over the past year, Magna’s shares are still cheap, trading for 12.7 times forward earnings, up from 22.3 times for the higher S&P 500. Still Better, stocks currently pay a dividend yield of 2%, so you actually get paid to invest in the company.
General Motors finally understands the importance of electric vehicles
- General Motors (NYSE: GM)
- Price: $ 48.8 (as of August 20, 2021)
- Market capitalization: 70.844.122.025
Better late than never for General Motors. The company’s previous efforts on electric vehicles were ineffective at best, as the Chevy Volt hybrid was discontinued and the all-electric Chevy Bolt didn’t move the needle much. (The latest news on Bolt is that GM has made two recalls due to the fire hazard posed by the EV batteries.)
As recently as last year, GM became involved in internal combustion engines and joined the Trump administration in a lawsuit against California over its fuel economy standards. It was later eliminated from the lawsuit when President Biden was elected and Tesla and electric vehicle stocks skyrocketed. While this could be seen as a political decision, CEO Mary Barra is actually serious about GM becoming a major manufacturer of electric vehicles.
And what General Motors lacks in foresight it more than makes up for in size, expertise and capital. In November, the company announced it would allocate $ 27 billion to expand its EV offering through 2025, and this summer it increased that number to $ 35 billion.
In total, the company expects to bring 30 new electric vehicles onto the market by 2025 and to drive them completely emission-free by 2035.
Of course, these plans will come to nothing if the company fails to make cars that people want to buy. That doesn’t seem to be a problem, however, and demand for electric vehicles is off the charts: the electric version of the former fuel guzzler Hummer sold out in less than 10 minutes!
While GM is well positioned to take advantage of the EV future, investors don’t see it that way. Electric vehicle manufacturers continue to be valued like technology companies, while General Motors is valued like a relic from a bygone era. General Motors stock currently trades at 8.4 times forward earnings, while Tesla stock currently trades at 139 times forward earnings.
GM might be late for the party, but the valuation gap here is extreme. If the company can successfully reposition itself as an electric car stock, which is becoming increasingly likely, investors could see significant returns.
Volkswagen could be the biggest EV winner
- Volkswagen AG (ADR) (OTC: VWAGY)
- Price: $ 32.67 (as of August 19, 2021)
- Market capitalization: 143.790.222.680
If the electric vehicle market picks up momentum, Volkswagen will likely be the biggest beneficiary.
As we discovered, if you plan to catch up with Tesla’s lead in the EV market, you need to scale. And true to scale, it is no larger than the German Volkswagen.
In addition to the brand of the same name, the company owns Audi, Porsche, Lamborghini and Bentley. Overall, Volkswagen is the largest car company in the world and sold more than 9.3 million vehicles in the past year. For comparison: Tesla sold 500,000 in 2020.
Like GM, Volkswagen has aggressive EV goals. The company expects half of US sales and 70% of European sales to be electric vehicles by 2030. (European drivers pay higher petrol prices and have shorter daily journeys, which makes electric vehicles particularly attractive on this continent.)
Volkswagen also has another potential growth driver for electric vehicles, even if its name isn’t on the hood. The company was an early investor in QuantumScape, the Bill Gates-sponsored company that is on the verge of launching solid-state lithium-metal electric batteries. The QuantumScape technology enables an 80 percent charge in 15 minutes, lasts about 12 years and offers more range per charge.
The company is still in development, but could be a game changer that VW will benefit not only technologically but also financially if QuantumScape signs deals with other EV companies.
Volkswagen stock is up 65% since the start of the year as investors were impressed with the company’s record performance. Volkswagen said year-over-year growth was driven by electric vehicles; Deliveries of electric vehicles increased by 165% compared to the same period of the previous year.
And yet, Volkswagen stocks – like Magna and General Motors – are still attractively valued compared to the broader market. Stocks currently trade for less than 10 times future earnings (less than half the broader market) and pay a dividend yield of 1.7% (higher than the S&P 500’s 1.3% payout).
The future of electric cars
The bipartisan infrastructure bill recently passed by the Senate provides $ 7.5 billion to build EV charging stations, and the big 3 automakers have pledged to generate 40-50% of their US EV sales each year by 2030.
It’s clear Washington and the auto industry are banking on electric vehicles. With increasing acceptance of the technology, the enthusiasm of investors for electric vehicles is likely to rise again. That makes today’s prices look like tomorrow’s bargains in the disillusionment hollow.