The electronic vehicle (EV) market potential has been surging in the face of a pandemic and global economic recession. COVID-19 has been a devastating disease for many, but it has progressed society by leaps and bounds, with advanced technology being leveraged more than ever before.
It is only natural that the move towards clean electric and autonomous vehicles accelerates. This acceleration is being zealously priced into well-positioned stocks like the EV king, Tesla (
TSLA Quick Quote TSLA - Free Report) , as well as rapidly advancing Nio ( NIO Quick Quote NIO - Free Report) , and even the controversial Nikola ( NKLA Quick Quote NKLA - Free Report) .
Since the beginning of the year, these 3 stocks have seen parabolic returns, with TSLA and NIO driving 399% and 470%, respectively. NKLA, an alt-energy vehicle giant that is yet to produce a single automobile, was up as much as 680% when its shares debuted in early June, surging past the valuation of Ford (
F Quick Quote F - Free Report) , an automotive legend that has been manufacturing cars for over a century.
NKLA shares corrected in the months to follow then took a steep nosedive following Hindenburg Research’s report about the enterprise & its CEO misleading investors. When the CEO stepped down shortly after, the stock really went south (down 59 % since earlier this month). Despite all these shortcomings, the SPAC IPO’d NKLA is still up 55% since its IPO merger with VectoIQ (run by prior GM exec) was announced in early May. For more color on Nikola, check out my analysis:
Bear Of The Day: Nikola ( NKLA Quick Quote NKLA - Free Report) . The COVID Effect
The pandemic had a vastly different impact on EV stocks than I ever would have predicted. I ended up selling out of most TSLA shares right when the COVID-crash began. With this thought process: a luxury automotive business that was having liquidity issues less than a year earlier will struggle to stay afloat if we enter an economic recession.
Boy, was I wrong, and I have long been pondering on the reasoning behind my blunder. How was TSLA able to keep its bottom line above water, what is continuing to drive Tesla's EV sales?
There is no one answer to these questions, but I will say one thing, the rich start spending when mortality is at the forefront of their minds. The pandemic has induced aggressive spending habits for those that can afford to have them. Being pent up in a house all day gives some people the desire to buy a new Tesla. This upcoming quarter is expected to be Tesla's strongest on record by a sizable margin.
Tesla has also proved its Shanghai factory a success, and with the Berlin Gigafactory planning to begin production in July of 2021, the future for this EV powerhouse is very bright. This radiant fate has been reflected in TSLA share price appreciation this year.
2.1 million electric vehicles were sold in 2019, still only making up 2.6% of global auto sales, but up 40% from the previous year, according to the International Energy Agency (IEA). 2020 is anticipated to be another record-breaking year for EVs, with analysts estimating that we will see 2.9 million vehicle sales globally. Tesla is a substantial driver of this sector's expansion, making up over 20% of its growth.
The IEA estimates that there could be 245 million electric vehicles on the road by 2030, more than 30 times today's figure (36% annual growth). The market potential for this industry is enormous, and that means that competition in this space will only continue to saturate over the next two decades. Tenured automotive conglomerates like Toyota (
TM Quick Quote TM - Free Report) , Volkswagen ( VWAGY Quick Quote VWAGY - Free Report) , GM ( GM Quick Quote GM - Free Report) , and Ford ( F Quick Quote F - Free Report) are not going to sit back idly and let these freshman tech startups take over an industry they have been building for decades (more than a century in some cases).
In the wake of some of the rhetoric used in the presidential debate Tuesday evening, the US EV market may be poised for another tailwind. Both candidates agreed that they would support the development of EV, which seemed to be about the only thing they agreed upon in Tuesday's contentious debate. TSLA looks to be the stock winner coming out of the first presidential debate.
The EV market is growing prolifically, and some of the hottest young alternative automotive enterprises have seen outrageous valuations that illustrate the market's optimism about this sector. Tesla has quickly picked up market share in the rapidly expanding space, but the real competition is only beginning to heat up. Seemingly the best-case scenario has been priced into TSLA, which is now trading at a double-digit forward P/S, something that had been previously unheard of for an automotive company. But TSLA isn't an automotive business.
TSLA, NKLA, and NIO are tech enterprises, and they should be valued accordingly. Still, the risk of investing in any of these stocks at their current (risk-adjusted) levels is high. I would wait for a broader market pull-back to buy into the EV revolution.
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