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In the before times, releasing a new paint color was about as innovative as the big automakers got. Change came slowly.
But 2020 was easily the most disruptive time in the auto industry since the days of the Model T: It was the year the United States committed to electric vehicles.
Last year, shares of Tesla (Nasdaq: TSLA) skyrocketed more than 700% as the company became the seventh-largest in the country. Tesla now has a market capitalization 9 times bigger than General Motors (NYSE: GM).
Inspired by Tesla’s success in the market, smaller electric vehicle companies rushed to go public, and the market was flooded with initial public offerings (IPOs) or special purpose acquisition company (SPAC) mergers for EV stocks Fisker (NYSE: FSR), Xpeng (NYSE: XPEV), QuantumScape (NYSE: QS), Canoo (Nasdaq: GOEV), and Hyliion (NYSE: HYLN).
But it wasn’t just start-ups fighting to make a splash in the space. Last year, CEOs from GM, Volkswagen Group (NYSE: VWAGY), and Ford (NYSE: F) began to double down in their pursuit of EV market share — they worried that Tesla was finally big enough to threaten the entrenched technology of internal combustion engines.
Here’s why EV stocks are out of juice
Rarely will you see so many forces align as you did last year. So naturally, you’d expect EV stocks to continue their amazing run that started last year … and you’d be mostly wrong.
In fact, shares of every electric vehicle IPO and SPAC I just mentioned have fallen this year. Tesla, too.
To explain why EV stocks are no longer accelerating, I want to share 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 hopes of winning market share.
- Disillusionment trough: Weaker competitors flame out, and investor interest wanes.
- Slope of enlightenment: Industry winners begin to emerge as the technology is increasingly accepted.
- Plateau of productivity: Mainstream adoption takes off and the industry begins to consolidate.
Now, in 2021, we’re seeing a transition from the expectation peak — when nearly everyone with a half-baked EV plan could receive funding — to the disillusionment trough.
However, as the framework shows, there are still significant gains to be made from the shift to electric vehicles as we enter the slope of enlightenment.
Because there’s such long-term upside in the auto industry as a whole, you don’t have to invest in a risky electric vehicle IPO today to benefit from the coming sea change in technology.
Instead, you can consider these three value-oriented 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 close Aug 19, 2021)
- Market Cap: 23,323,914,687
Apple’s (NASDAQ: AAPL) “Project Titan” has been a long-running open secret in tech circles. Here’s what we know: Apple is working with more than 1,000 experts to design an electric vehicle.
A report earlier this year said a joint venture between LG and Magna International (NYSE: MGA) could provide the electric powertrain.
Apple wins are always game-changing for suppliers, but it’s likely Magna will play a bigger role — as both a manufacturer and assembler. Traditionally, automakers have used a soup-to-nuts approach, meaning that they design, manufacture, and assemble all components of their vehicles.
Increasingly, many EV makers like Fisker are only involved in designing the product … and Apple is well-versed in the design-only approach, using manufacturers like China’s Foxconn for iPhone and iPad assembly and producers like TSMC to make chips.
Even if Magna doesn’t win the Apple deal, it should still benefit from the shift from internal combustion engines to EV. The company has a long record of partnering with Ford and General Motors both as an assembly partner and a component manufacturer, so the rising tide of EV vehicle sales should lift Magna’s boat, too.
What’s more, with capital drying up, many other EV makers will likely take a design-only approach and outsource manufacturing to companies like Magna that have scale and a history of success. As an example, Magna recently signed a deal with Fisker to assemble the company’s Ocean SUV.
Despite shares rallying nearly 58% in the past year, shares of Magna are still inexpensive, trading for 12.7 times forward earnings versus 22.3 times for the greater S&P 500. Even better, shares currently pay a 2% dividend yield, so you actually get paid to invest in the company.
General Motors finally understands the importance of EVs
- General Motors (NYSE:GM)
- Price: $48.8 (as of close Aug 19, 2021)
- Market Cap: 71,250,604,692
Better late than never for General Motors. The company’s earlier efforts in EVs have been ineffective at best, with the Chevy Volt hybrid being discontinued and the fully electric Chevy Bolt failing to move the needle in a significant way. (The most recent news about Bolt is that GM has issued two recalls due to fire risk from the EV batteries.)
Even as late as last year, GM was committed to internal combustion engines, joining the Trump administration in a lawsuit against California for its fuel economy standards. It later dropped out of the suit as President Biden was elected and as Tesla and EV stocks soared. Although you could see that as a political decision, CEO Mary Barra is indeed serious about GM becoming a major EV manufacturer.
And what General Motors lacked in foresight, it more than makes up for in scale, know-how, and capital. In November, the company said it would allocate $27 billion by 2025 to build out its EV offerings, and this summer it raised that number to $35 billion.
All told, the company expects to bring 30 new electric vehicles to the market by 2025 and hopes to go full zero-emission by 2035.
Of course, these plans will go nowhere if the company fails to make cars that people want to buy. However, that does not appear to be a problem, and EV demand has been off the charts: The electric version of the former gas-guzzling Hummer sold out in less than 10 minutes!
Although GM is set up nicely to take advantage of the EV future, investors aren’t seeing it that way. EV carmakers continue to be valued like technology companies, while General Motors is valued like a relic of yesteryear. General Motors stock currently trades at 8.4 times forward earnings, while Tesla currently trades at 139 times forward earnings.
GM might be late to the party, but the valuation gap here is extreme. If the company can successfully reposition itself as an electric car stock, which is increasingly likely, investors could be in for significant returns.
Volkswagen could be the biggest EV winner
- Volkswagen AG (ADR) (OTC:VWAGY)
- Price: $0 (as of close Aug 19, 2021)
- Market Cap: 143,790,222,680
If the electric vehicle market takes off, it’s likely Volkswagen will be the biggest beneficiary.
As we’ve established, you need scale if you plan on catching up to Tesla’s lead in the EV market. And when it comes to scale, it doesn’t get bigger than Germany’s Volkswagen.
In addition to its namesake brand, the company owns Audi, Porsche, Lamborghini, and Bentley. All told, Volkswagen is the largest car company in the world, selling more than 9.3 million vehicles last year. For a point of comparison, Tesla sold 500,000 in 2020.
Like GM, Volkswagen has aggressive EV goals. The company expects half of U.S. sales and 70% of European sales to be EVs by 2030. (European drivers pay higher gas prices and have shorter daily commutes, making EVs particularly attractive on that continent.)
Volkswagen also has another potential EV growth driver even if its name isn’t on the hood. The company has been an early investor in QuantumScape, the Bill Gates-backed company that is close to bringing solid-state lithium metal EV batteries to market. QuantumScape technology allows 80% charging in 15 minutes, lasts around 12 years, and provides more range per charge.
The company is still in development but could be a game changer that benefits VW not only technologically but also financially if QuantumScape signs deals with other EV companies.
Volkswagen stock has jumped 65% year to date as investors have been impressed with the company’s record performance. Volkswagen said the year-over-year growth has been fueled by electric vehicles; EV deliveries increased 165% over the prior year’s corresponding period.
And yet — like Magna and General Motors — Volkswagen stock is still attractively priced compared with the broader market. Shares currently trade for less than 10 times forward earnings (less than half of the broader market) and pay a dividend yield of 1.7% (higher than the S&P 500’s 1.3% payout).
The future of EVs
The bipartisan infrastructure bill recently passed by the Senate includes $7.5 billion to build EV charging stations, and the Big 3 automakers have committed to having 40%-50% of their U.S. sales each year come from electric vehicles by 2030.
It’s clear that Washington and the automotive industry are rooting for EVs. As adoption of the technology grows, investors’ enthusiasm for EVs should rise again, too. That makes today’s prices in the disillusionment trough look like tomorrow’s bargain.