With consumer uptake proving slower than expected, electric-vehicle sales growth has been falling, and the stocks have been plunging. On top of that, the industry pioneer,
Tesla,
just recalled virtually all of its vehicles sold in the U.S.
It’s enough to make investors give up on the companies that produce electric vehicles. But despite the turmoil, there are still opportunities. The key is to focus on auto makers with two attributes: affordable cars and profitable operations. In the early days of EVs, which is to say two or three years ago, things like that didn’t matter. Excitement alone drove the stocks to staggering heights. Now, practicalities count.
There’s no question the EV bubble has burst. The combined peak market capitalization, reached in 2020 and 2021, of
Nikola,
Fisker,
Rivian Automotive,
Lucid,
NIO,
XPeng,
Polestar Automotive,
Canoo,
and
Lordstown Motors
was as high as $470 billion. Today, the nine companies’ market caps add up to just $68 billion—a drop of 86%.
So far, only three EV makers are consistently profitable:
Tesla,
BYD,
and
Li Auto.
But even those stocks have taken it on the chin. Their peak market capitalizations totaled some $1.4 trillion. Today, that sum is down to about $910 billion.
Tesla’s
market value has gone from about $1.2 trillion to about $790 billion.
Perhaps the biggest problem for the industry has been the high prices of the cars. The average electric vehicle costs some $52,000. While that is down from about $65,000 in November 2022, it’s about 20% higher than the average nonluxury car. Legions of consumers have balked at the prices.
The pricing problem will only get worse when EV models lose part, or all, of their $7,500 tax credit for buyers on Dec. 31, when new rules about the origin of batteries and battery materials go into effect. (The U.S., essentially, doesn’t want to subsidize EVs with Chinese batteries.)
Faraday Future Intelligent Electric
is a case study in the perils of high-price EVs. The company makes ultraluxury, 1,000-plus horsepower cars priced around $300,000. Shares of the start-up peaked at a split-adjusted $1,660 in February 2021—and closed at 26 cents on Wednesday.
To the extent that EV prices have fallen, Tesla deserves most of the credit. It has cut prices repeatedly in 2023, partly to offset the pain of higher interest rates. In the third quarter, Tesla’s average selling price was about $44,000. Other battery-electric cars cost an average of about $64,000.
Tesla ran into a problem of its own this past week, recalling some two million of its vehicles for updates to their self-driving software systems. That, however, isn’t as ominous as it sounds: Millions of vehicles are recalled every year, and this recall is software-based and costs virtually nothing to correct. The required changes are only about driver warning signals—not the underlying technology—and aren’t technically an EV issue.
At this point, what EV makers need most is cheaper cars. What investors need are shares of auto makers that sell cheaper cars profitably. Two good bets are Chinese auto makers
Li Auto
and BYD.
Tesla has its attractions, too, but Li and BYD sport markedly lower valuations. Tesla trades for about 60 times estimated 2024 earnings; BYD for about 13 times. Both companies are expected to grow earnings at just under 30% a year on average for the coming three years. Li is trading for 20 times earnings. It is expected to grow earnings at 20% a year for the coming three years.
Before concluding that Li stock is overvalued, consider this: Its price-to-earnings-to-growth ratio, or PEG ratio, is one times. Tesla’s PEG ratio is about two times, as is the
S&P 500’s
. Li only recently got to the scale required to achieve profits. It’s shipping some 40,000 vehicles a month. It trades for about one times estimated 2024 sales.
Lucid
stock, by contrast, trades for about six times sales.
The average price for a BYD car was under $30,000 in the third quarter. For Li, it was about $45,000. That’s closer to something car buyers can get comfortable with.
Make no mistake: Traditional auto makers haven’t been spared from the EV pain.
General Motors,
Ford Motor,
Stellantis,
and
Volkswagen
have all leaned into the EV trend, announcing billions in spending on battery plants and new models. Their combined market capitalization has gone from a peak of about $425 billion to $235 billion, down 45%.
Investors looking for exposure to traditional car makers should focus on the same mix of profitability, affordability, and attractive valuation. GM stock is down 12% from the start of July, when labor issues started to weigh on investor sentiment. After a contentious strike, GM’s hourly workers got base wage increases of roughly 25% over the life of a new four-year-plus labor contract.
Investors have been worried that higher costs would crimp profitability, but GM Chief Financial Officer Paul Jacobson says his company has plans to offset all the labor cost increases in the coming year. Wall Street doesn’t buy it yet. Analysts project a 2024 operating profit margin of 6.6%, down from 7.4% expected for 2023.
If GM can manage to produce an operating profit margin of 7.4%, earnings per share should be closer to $8.25, leaving the stock trading for about four times 2024 earnings.
Beating low expectations is always a winning strategy on Wall Street, no matter what the sector.
GM is also launching a cheaper EV in the U.S. in 2024. The electric Chevy Equinox should start at around $35,000. That could be just the ticket.
Write to Al Root at [email protected]
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