Watch Out Electric Vehicle Manufacturers, the Big Guys are Coming

Tuesday, July 21, 2020 6:40 AM | Neal Farmer

Electric vehicle stocks have been all the rage recently. Stocks with ties to the industry have performed very well recently.

Everyone knows about Tesla (TSLA) and how its stock has shot all the way up to around $1,600 after trading below $400 back in March. That’s not a bad return  since coronavirus swept across the globe.

Tesla is not the only electric car company though. Companies such as Nikola (NKLA) and Workhouse (WKHS), have seen a spike in stock price while Fisker and Hyliion have recently announced mergers with Spartan Energy Corp. (SPAQ) and Tortoise Acquisition Corp. (SHLL), respectively, earning both big price boosts. This is all for these small companies that are attempting to establish a foothold in the electric-vehicle industry, but it won't be long before the big companies start to take over.

Several of the world's automaking giants have begun to produce and sell electric cars for the general public. Hyundai (HMC), Toyota (TM), General Motors (GM), Ford (F) and many others have made progress on their electric vehicles but they still remain a small part of the overall business. With the recent rise in demand for electric vehicles and the ever-growing popularity of Tesla, many automotive companies are going to remodel their business plan so as not be left behind in a possible market shift towards vehicles powered by sustainable energy.

This shift in business tactics would be a great development for consumers as dealerships could provide ample numbers of both electric and gas powered vehicles. By itself, without some new government regulation, this would not be a situation where shifting towards electric vehicles would hurt those who want to drive gas cars. The people that still want their gas vehicles could still purchase them and any price change from a dual-fuel business plan should be minimal.

The industries that are going to be hurt are oil companies and the new, smaller automakers that are focusing on electric vehicles. The problem that a Fisker or Hyliion is going to have is they lack the economies of scale that would allow them to be able to compete with the larger companies.

The automotive industry is highly reliant on massive supply chains that feed massive factories across the world. This scale helps keep prices low. Lots of consumers are pretty price sensitive when making a purchase as large as a car or truck. At the end of the day, if Toyota builds an electric vehicle and Fisker produces one, the Toyota is very likely going to be much cheaper as they have the machinery to build a car at a much lower price point than others.

General Motors already is preparing for this as the company revealed yesterday that they are on schedule to deliver 20 different electric vehicles in the next three years. Most of the major automotive  brands today are offering one or two full electric vehicles but are now focusing on producing a wider variety. General Motors is not alone in this evolution of vehicles as many companies realize this is the future.

The clear leader in this market is Tesla but even they only provide four unique vehicle models albeit with two more on the way (Cybertruck and Roadster). If General Motors is on schedule to deliver 20 different models across their four major brands, then Tesla is going to have some stiff competition for EVs. Tesla is less likely to be significantly hurt by this transition as they are already the clear leader and have a huge reputation that cannot be easily outshined by other manufacturers. Additionally, Tesla doubles as technology company with the constant major updates their vehicles receive keeping Teslas atthe forefront of new car features.

Tesla actually already has a pretty large operation going even if it's not at the same level of Nissan (NSANY) or Volkwagen (VWAPY). That said, their stock price is pretty high for a company that has yet to be profitable for four quarters in a row.  The stock market is a weird place right now though, so Tesla very well may continue to climb for some time.

Nikola is also less likely to be hurt by the major automakers as they currently are focused on large commercial trucks. However, it won't be long before someone like PACCAR (PCAR) or Volvo decides they are tired of smaller companies eating away from their truck market. Still Nikola does look to be in a strong position for now as they face very few competitors at the moment.

What investors should focus on is the technology leaders behind the electric vehicle movement. EVs have been increasingly popular for some time but have recently seen a massive rise in attention with investors trying to buy in now. Larger manufacturers are going to dominate the space just as they dominate the gas powered market but battery or charger makers may stand to gain the most. Automotive manufacturers might be performing poorly right now and do not offer the most growth potential, but they do stand to take advantage of EVs becoming popular. They also are typically a very safe investment with their strong dividends and likelihood of being bailed out AGAIN should any problems arise.

Many of these large companies will use other’s batteries for their vehicles and those might be the biggest gainers from this shift. DPW Holdings (DPW), for example, announced the launch of new fast DC chargers to be used by EVs built by many manufacturers including Tesla. The new line will include stations for households and commercial applications. Competitor Amperex Technology Ltd. (CATL) also looks poised to prosper from this market shift as Honda has announced they are buying a 1% stake in the EV battery maker.

Some of the stocks to avoid might be Fisker and Hyliion at least when using a buy and hold strategy as the large manufacturers catch up. Oil/gasoline companies are also likely to be hurt as the demand for gas vehicles falls and the automotive industry makes up a significant portion of the industry. It may take an extremely long time until gas vehicles are outnumbered by alternative energy sources but the rise of electric vehicles will no doubt lead to a decrease in consumption of gasoline and diesel.

Electric vehicles are on the rise right now with many stocks surging to heights that their fundamental valuations don't support. While that may be one reason to avoid buying some of the biggest risers, the true concern lies in the sleeping giants that are preparing to deliver a wide variety of electric vehicles at an affordable price in the very near future.

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