Are electric vehicle stocks overhyped? Should investors avoid them? Tesla (NASDAQ:TSLA), Lucid Group (NASDAQ:LCID), and Rivian Automotive (NASDAQ:RIVN) are some of the most discussed and valued electric vehicle (EV) stocks. So let’s have a closer look.
First, even if there is an overvalue to electric vehicle stock, it does not negate that much of the industry’s hype is true. Instead, several secular tailwinds are pushing the EV sector forward. The following are some examples:
- The clean energy revolution is happening right now.
- Government support and regulation assisted the shift to hybrid and electric vehicles.
- Positive investor sentiment allows firms like Tesla to operate with ease (issuing capital, attracting top talent, etc.). As a result, the industry’s fundamentals are improving.
This suggests that EVs will have a significant role in the world economy over the following decades. However, contrary to popular belief, there is already consideration of many of these expectations in EV stock valuations. There’s a big gap in valuations between electric automakers (Tesla, Rivian, and Lucid) and traditional carmakers like Ford (NYSE:F) and General Motors (NYSE:GM).
The valuations of Rivian and Lucid are unfavorable because there isn’t an expectation of producing earnings in the next year. Tesla is already profitable. But is that EV stock overvalued at first glance?
High stock prices are not an issue since firms may grow into their valuations. That’s what the market is anticipating from Tesla, Rivian, and Lucid. For example, the current analyst consensus expects Tesla to expand sales by 56% and 29% over the next two years.
Tesla is a good value stock based on its growth rate, some profit margin assumptions, and long-term expectations for market share and EV industry sales growth.
Tesla investors aren’t buying the company based on its present condition but instead for what it will become as it expands at a breakneck pace in the future. In this regard, electric vehicle stocks are not overhyped. Furthermore, they are evidence of investors’ optimism in the sector and leading EV players.
With any investment appraisal, if the stock is a “good value,” it’s worth asking, “Compared to what?” It’s a good question because if you believe the EV sector is worth “X” based on long-term industry growth projections, you have to assume conventional automakers’ EV businesses are worth “Y” using many of the same assumptions. You should think that the former is a better bargain than the latter.
That isn’t an easy assumption to make because automakers such as Ford and General Motors have been investing heavily in electric vehicles. For example, Ford will only sell EVs in Europe by 2030 while the company continues to invest in expanding its EV capability to offset potential ICE sales declines. By 2030, Ford wants fully electric cars to account for 40% of its product line.
It’s reasonable to assume that by 2030, Ford will be a 40% electric business. Assume that the company’s value is anything near to Tesla’s current EV unit valuation. In that scenario, the stock may provide good value.
Are EV stocks overhyped?
The short answer is “no,” because the move to electric vehicles is genuine, resulting in a long development road ahead. However, that does not imply that they are automatically the best value in the business. Furthermore, given this year’s industry underperformance – owing to lower production expectations – it’s probably a good idea to look at some beaten-down stocks in the sector with outstanding growth prospects over the next era of EVs.