Here’s Why Companies Part of the Electric Vehicle Sector Are Promising Long-Term Bets
Tesla and NIO are two of the several companies that are positioned to benefit from the rapidly expanding electric vehicle space.
Several countries around the world are looking to shift towards the deployment of clean energy solutions in order to reduce the negative environmental impact that has taken a huge toll on climate change in the last decade. Governments are aggressively supporting clean energy initiatives by building the required infrastructure as well as providing subsidies on these products to drive demand higher.
The electric vehicle or EV segment remains one of the most attractive clean energy sectors right now. This industry has already attracted a fair number of players including Tesla, NIO, and a host of other legacy automobile manufacturers such as Ford and Volkswagen.
According to a research report from Allied Market Research, the global EV market was valued at $162.34 billion in 2019 and is forecast to touch $802.81 billion by 2027, indicating a compound annual growth rate of 22.6% in this period.
Asia-Pacific remains the largest market in the world and generated $84.84 billion in sales back in 2019. Sales for this region might touch $357.81 billion by 2027. This rapid expansion in the total addressable market will increase competition but established leaders such as Tesla remain well-poised to benefit from these secular tailwinds.
Tesla stock is down 26% from record highs
Tesla has been on an absolute tear since it went public back in July 2010. Its stock has in fact returned a cumulative 16,950% to shareholders in just over 11 years, easily crushing the broader markets. Despite these astonishing returns, Tesla stock is down 26% from all-time highs providing investors an opportunity to buy the dip.
Tesla shares have fallen over 8% in the last few trading sessions possibly due to an investigation into the company’s autopilot or partially assisted driving system in models launched post-2014 after several crashes were reported.
But investors should note that Tesla continues to remain a top long-term bet given its well-positioned to benefit from a range of factors including robust demand and a strong balance sheet, among others. Further, it continues to deliver on its promises while experiencing significant growth in top-line and profitability.
Tesla has managed to increase sales from $11.75 billion in 2017 to $31.56 billion in 2021. Its operating margin has also improved from a loss of $1.63 billion to a profit of $1.99 billion in this period.
Wall Street forecasts Tesla sales to rise by 58.6% to $50 billion in 2021 and by 35% to $68.5 billion in 2022. This will allow the EV heavyweight to increase its earnings per share from $2.24 in 2020 to $6.97 in 2022.
Economies of scale
Tesla’s deliveries have increased from 50,000 units in 2015 to almost 500,000 units in 2020. The company claims it remains on track to ship 800,000 units this year as its quarterly production numbers are well over 200,000 units.
Tesla grew its shipments by 36% year over year in a pandemic hit 2020. This pace of shipment growth accelerated in the first half of this year as deliveries were up 109% and 121% in Q1 and Q2 respectively. Its delivery numbers could be even higher as several industries have been impacted by the shortage of semiconductor chips.
In the last three years, Tesla’s sales have risen at an annual rate of 45% to touch $41.9 billion in the June quarter. Its gross margin has also risen to 22% in Q2, compared to a margin of 14.4% in the same period in 2018.
The company has managed to lower production costs as it benefits from economies of scale and strong demand. In 2020, global EV sales rose 41% to 3.1 million units account for 4.6% of all cars sold. Now, according to a report from BloombergNEF, annual passenger EV sales might grow to 14 million by 2025 and around 60 million by 2040 giving Tesla enough room to keep growing its revenue over several decades.
The final takeaway
Similar to Tesla there are several other stocks that will stand to benefit from the augmented shift towards EVs. BloombergNEF expects electric vehicles in large automotive markets of Germany and China to account for 40% and 25% respectively of total auto sales by 2025.
These trends make Chinese manufacturers such as NIO a solid bet as well. China is currently the largest EV market in the world where Tesla has constructed a manufacturing facility in Shanghai. The increase in purchasing power of the Chinese middle class as well as growing GDP rates and ongoing federal support has already enabled NIO to increase sales from $760 million in 2018 to $2.55 billion in 2020. NIO stock in fact rose over 1,100% in 2020.
