AAfter a rocky start to the year, electric vehicle (EV) inventories have rebounded nicely since the calendar shift in July. With EV manufacturers You’re here (NASDAQ: TSLA) and Rivian (NASDAQ: RIVN) down about 21% and 68%, respectively, since the start of the year, but up 22% and 27% this month, investors may be wondering if it’s time to buy electric vehicle stocks.
If you’ve been a believer in the transition to electric vehicles for a long time, I think now is the time to take action on electric vehicles. Here’s why.
Electric vehicle supply chains are being established
Many consumers and businesses have wondered if the world could shift to an EV-based vehicle infrastructure due to the scarcity of battery components. However, on July 21, Ford (NYSE:F) allayed some of those fears by announcing that it had secured the raw materials needed to produce 600,000 electric vehicles per year by the end of 2023. Additionally, it provided 70% of the battery capacity needed to support at least a production rate of 2 million electric vehicles by 2026.
Although this announcement is specific to Ford, it shows how material supply chains are being set up to support this growing industry.
Yet the same issue that plagued traditional vehicles also affected electric vehicles in the second quarter.
The shortage of microchips is still raging, affecting all automakers. The delivery time for an average microchip averaged 27 weeks in June, nearly double what it was in the five years to 2021. Demand for these chips isn’t going away and companies like Texas Instruments are building new factories to ease the supply shortage. The chip shortage affects electric vehicles more than gas-powered cars, as electric vehicles typically use about double the number of chips that traditional vehicles do.
This shortage is still a long-term problem, but when it is resolved, expect EV manufacturers to be able to operate at full capacity, which will likely boost revenue and profits significantly.
How are electric vehicle manufacturers faring?
Tesla recently released its second quarter results, and despite COVID lockdowns and supply chain issues, it still posted big numbers. Total production rose 25% year-over-year (year-over-year), while its revenue exploded 42% higher due to higher vehicle prices. Moreover, his operating margin fell from 11% last year to 14.6% this year, although this marks a decline from the 19.2% figure posted in the first quarter.
The company also reiterated its projection of annual growth in vehicle production rates of 50% “over a multi-year horizon.”
Newcomer Rivian is just beginning its rise, but it has also delivered strong results for investors. Management reiterated its production target of 25,000 vehicles for 2022 and produced 4,401 vehicles in the second quarter, compared to 2,553 produced in the first quarter. Additionally, Rivian has started delivering Amazon‘s Electric Delivery Van (EDV) recently, demonstrating its ability to meet demand for the 100,000 units Amazon wants to deliver by 2030.
As for traditional vehicle manufacturers like Ford, the shift to electric vehicles is just beginning. In June, Ford produced and sold 4,353 electric vehicles, up 76.6% year-on-year. Ford has a long way to go to reach its goal of 600,000 EVs by the end of 2023, but with its vast resources it should have the wherewithal to get there.
Are EV stocks a buy?
Despite a strong July, electric vehicle stocks are still well below their peak. However, many deserved to be sold at high valuation levels. Tesla is still trading at 66 time forward earnings, far superior to Ford’s 6.7. While I don’t think it’s a good idea to compare these two companies directly (due to different margin profiles and stages of growth), it’s worth noting that Tesla may see a lot of price volatility due to its valuation .
Still, I think Tesla is the premier EV stock to own because of its future growth and market leadership. However, to invest wisely in Tesla shares, investors must commit to holding them for three to five years; anything less will not allow trading results to influence the stock price.
As for the upstart Rivian, he is still too young for my taste. There are a lot of unknowns with the ramp-up of production, and the business burns money. So while I want this to be successful, my investment dollars will not be associated with the business.
I’m not a big fan of traditional car manufacturers, but I think they may have some value if they can smoothly transition to electric vehicles without abandoning their current internal combustion engine (ICE) business. However, with Ford laying off 8,000 workers from its ICE business, I’m not sure this is the right balance.
EV shares can be bought now if you understand the risk associated with each company. Additionally, the rollout of electric vehicles won’t be complete for some time, so investors should be prepared to ride the market waves. However, I think this space is full of investment opportunities with the right picks and the right holding period.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Keithen Drury has positions in Tesla. The Motley Fool holds positions and recommends Amazon, Tesla and Texas Instruments. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.