How To Invest In EVs (Hint: It’s Not Tesla Or Rivian)

How To Invest In EVs (Hint: It’s Not Tesla Or Rivian)

Electric Vehicle in Park Charging station in UK Street getty As the advisors below observe, there is little doubt that electric vehicles are an enduring trend. But the most popular names today may not necessarily be the best long-term investments. Here, a trio of newsletter advisors from the Cabot Wealth Network — and contributor to — caution against jumping on some of the more speculative names while highlighting some alternative picks in the EV space.

We’re convinced that electric vehicles will eventually rule the road. A hundred years from now, the average citizen will wonder aloud when they think about how oil was used in the past… “you mean they actually burned that stuff!?”

Yet that future is not here yet, and we doubt that the pace of adoption will be anything like the optimists anticipate. In the U.S., about 3% of vehicles sold last year were electric vehicles, and these were subsidized by government tax credits and other benefits.

We’re watching with wonder how Tesla (TSLA), a $65 billion company in late 2017, is now a $1 trillion company and that Elon Musk, by himself, is worth more than all of ExxonMobil XOM -0.6% (XOM).

While its future is exceptionally bright, Tesla’s stock valuation already discounts most of its coming prosperity. It is already worth perhaps twice the entire remaining auto industry. Surely it can’t garner a 70% implied share of all future industry profits, which its stock price implies? Its valuation has matched and then exceeded its position on the innovation curve.

Rivian Automotive (RIVN), which IPO’d on November 10, was recently the #3 most valuable car company in the world. The company as delivered 156 vehicles in its history and will probably lose $2 billion this year. This compares to Volkswagen (VWAGY) — the former #3 company — which will likely earn $15 billion this year on the 6.5 million vehicles it has delivered so far this year, which includes 300,000 electric vehicles. VW, no slouch in the high-performance EV segment, has delivered almost 29,000 Porsche EVs.

Rivian has orders for about 55,000 vehicles from individuals and another 100,000 from 20% owner Amazon AMZN -1.4% (AMZN). The company says it can produce 200,000 vehicles a year, if it expands its current facilities, by perhaps 2024. That’s a long time to wait for what may be an outdated vehicle, especially when it takes only a $1,000 fully-refundable deposit to hold a retail order.

Looking at valuations, Rivian recently traded at $720,000 per vehicle produced (based on its 200,000/year target), while Tesla trades at about $500,000/vehicle (based on $1.0 trillion market value and 2 million units/year). On the news that Hertz (HTZWW) was ordering 100,000 Teslas TSLA -6.4% , TSLA shares jumped 12%, adding roughly $120 billion of market value. Those incremental Hertz-Teslas were apparently worth $1.2 million per vehicle.

Dull giant Volkswagen (VWAGY) trades at about $12,700/vehicle produced, assuming a recovery to its normal 11 million vehicle volume. General Motors (GM GM -2.1% ) is valued at about $11,500/vehicle, based on its $92 billion market cap and a normalized output of 8 million vehicles.

Is a Tesla in a few years really worth 43x a GM vehicle today? We certainly appreciate the reality of wider operating margins at Tesla (perhaps 25%) and the hope of wide margins at Rivian, as well as the absence of legacy pension and other liabilities, compared to margins of perhaps 10% at General Motors.

We also recognize the vast array of side hustles including battery production, insurance, fleet/ride-sharing, and other high-margin services that Tesla can provide, along with the cache of its brands. But we wonder if GM and VW really are that far behind in the EV transition and their ability to offer new services. Can the value gap be even reasonably justified? We think not.

But until the gravity of easy money and high speculation unravels, there likely won’t be much to pull the valuations together. And when they do eventually converge, it will be Tesla and Rivian becoming cheaper a lot more than it will be from GM becoming more valuable.

This is a great sector to invest in, as revolutionary developments challenge the old guard of the industry. And it’s becoming increasingly clear which of these contenders will thrive and which are on their way to death or acquisition (most of those smaller electric manufacturers).

But which ones are worth considering for new investors in the sector today? My first picks include established companies with strong charts. Interestingly, they also provide global diversification through different countries.

Ferrari (RACE) […]

source How To Invest In EVs (Hint: It’s Not Tesla Or Rivian)

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