Think Tesla Is Overvalued? Here Are Some EV Plays You Might Have Missed

If the G-7 gets its way, the Electric vehicle space is set to explode in the following decade.

The influential Group of Seven (G7) is pushing for a “green revolution” to combat global warming with the United States, United Kingdom, Canada, Japan, France, Germany and Italy. Via a pact, the seven wealthy democracies have committed to net-zero carbon emissions by “no later than 2050” and to halving carbon emissions by 2030.

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China has even surprised the world with a push for green energy. According to official reports for 2020, the country installed more wind capacity than the rest of the world combined.

Whether or not you believe that G7 is taking the right stance on the issue, its decisions will impact your portfolio.

The Power of the Electric Vehicle Market

This is especially true for the electric vehicle (EV) sector. 

According to a Swiss bank, the Electric Vehicle market will account for 100% of the auto market by 2040.

Indeed, the EV market is expected to be worth $2.5 Billion by 2027, according to a report by Meticulous Research. That is equivalent to a compound growth rate of 33.6% and represents 234 million units.

Meanwhile, EV’s could soon be price-competitive than gas-powered vehicles, even without subsidies…thereby making them far more attractive to average consumers who might prefer the convenience of no longer needed to fill the tank, while simultaneously saving on gas.

Investors are seeking to take advantage of this emerging industry. Here are some that are aiming to be part of the transition.

Tesla: A Tremendous Future Or Overvalued Stock? 

Tesla Founder, Elon Musk

Tesla is the undisputed leader in the EV space. For now, anyway.

Tesla controls almost 79% of the EV market in the United States— an impressive feat for a company that was founded in 2003.

Tesla certainly benefited from the fact that other automakers were dragging their feet on the EV transition. Legacy automakers were concerned that a shift to EV’s would cannibalize their profits from gas cars.

But, now the space is getting increasingly crowded. Ford, among others, has announced a new push in the EV space. 

Can Tesla continue to compete?

There’s certainly some benefit in being first to market. Elon Musk has built a stellar, trusted brand around the company and inspired tremendous brand loyalty.

Tesla also has the edge in the fact that its CEO is not afraid to innovate. The company had made serious inroads in the solar panel and the stationary energy storage industry. And, the company is seeking to further expand in the “green energy” space.

Despite the positives, one can’t ignore the sky-high valuation on this company–which is trading at a multiple of 600 times earning causing many investors to believe the company is significantly overvalued. Indeed, Tesla is worth more than Toyota, Volkswagen, GM and Ford combined!

And, with the average PE ratio of the S&P 500 is 45, (with historical numbers usually ranging from 10 to 15 which may tell you something about how richly valued the entire market currently is!) it’s clear there’s reason to question how the valuation of Tesla. Skeptics argue that Tesla’s rapid growth will stall out as more competitors enter the market space.

Other investors are increasingly concerned with the power of Elon Musk’s brand which has become polarizing in recent years thanks to his Twitter fame.

Bottomline: Tesla may be a risky play for some investors just getting into the EV revolution now.

But, there are other ways to be in the this space.

Battery manufacturers 

Plenty of companies are in a strong position to benefit from the EV frenzy–including those with far less buzz around them and less extravagant valuations.

This includes Lithium-ion battery manufacturers. These batteries power everything from cellphones to the Mars Curiosity rover.

These batteries also power all electric vehicles.

Indeed, the battery is the single most expensive component of an EV. In 2020, the battery accounted for 30% of the total cost of the electric vehicle. In 2015, it made up 57% of the EV’s cost of production. If minerals such as kobalt and lithium become more expensive, the battery’s share in the EV’s cost might increase again. Panasonic, LG Energy Solutions and CATL (a Chinese company) are all leaders in the battery space.

Investors should beware, however, that the Lithium-ion battery market has disadvantages. It’s competitive….and, judging by some recent investment in U.S. battery markers, about to become even more competitive.

According to Forbes, the cost of lithium-ion batteries has fallen 89% in the past decade, from $1,100/kWh in 2010 to $137/kWh in 2020.

Makes sense. It’s a little like the flat screen technology business, as the the technology improves, the products are produced more cheaply. The industry, therefore, will need to depend on volume to reap their biggest rewards.

Lithium Mining Companies  

Another area to focus on for investors…and a diversified way to invest in the EV space…is  by looking at the companies that mine the lithium needed for the batteries themselves.

Lithium mining companies own large quantities of lithium. So when the demand for lithium increases, the value of their assets will increase.

Brine pools for lithium mining

Some of the largest lithium mining companies, include:

Jiangxi Ganfeng Lithium in Xinyu, China

Albemarle in North Carolina, US

Tianqi Lithium in Chengdu, China

Sociedad Química y Minera (SQM) in Santiago, Chile

Mineral Resources Limited, Australia

Battery Recycling Companies 

Perhaps an unlikely play, lithium battery recycling companies may be in a great position to benefit from the EV revolution.

Li-Cycle is a company founded in Toronto in 2016. It calls itself the largest lithium-ion battery recycler in North America and announced a deal to go public via a SPAC earlier this year, under the ticker symbol LICY.

In sum, if you’re just joining the EV investing craze, there are multiple avenues to consider — and you need to always go to the most obvious and expensive stock in this sector. There is an entire industry that could be built up around the Electric Vehicle market, and if the G-7 has anything to say about it, it’s just getting started.

 

 

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