Tesla stock is a pick for a play on autonomous driving.
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Electric vehicles are taking over. That spells opportunity for investors. The growth of EV sales is great, but investors still need to be able to separate the wheat from the chaff. Research provider Fundstrat believes investors should look up and down the value chain—from materials suppliers to auto makers—to best profit from the EV trend.
Sales of battery-electric vehicles in the U.S. grew almost 50% in 2021, while sales in China grew about 170%. Chinese EV penetration of new-car sales was almost 15% for all of 2021. U.S. penetration of all-electric and hybrid-electric vehicles was lower, at roughly 5%, but forecasts project EV penetration in the U.S. will reach 40% to 50% by the end of the decade. President Biden’s goal calls for 50% penetration of new-car sales.
The numbers mean that in the U.S., EV sales should grow roughly 12-fold over the next eight years, or 33% a year on average. Growth like that will lead to big stock gains.
For which stock, however, is the question. Profit “margins are pretty thin on cars, and consumers are very fickle in their consumption patterns and brand loyalty,” wrote Fundstrat in a research report last week. Picking a handful of EV makers might not be the best strategy. “We will look not only at direct exposure to the electric-vehicle manufacturers but also other innovative ways to get exposure.”
The research house has five picks, one from five areas of the EV value chain: materials, suppliers, semiconductors, autonomous driving, and auto manufacturers.
Autonomous driving may not seem like part of the EV theme, but as cars go electric, they get smarter with more software and more semiconductors managing everything from charging times to power output. Self-driving features and electric vehicles will develop together over the coming years.
EVs, of course, use a lot of batteries which use a lot of lithium. The materials pick for Fundstrat is Albemarle (ticker: ALB), one of the world’s largest miners of lithium. “This is literally a ‘picks and shovels’ play to the EV revolution,” wrote Fundstrat. “We also like the capital discipline and experienced management team the company has. They have other divisions besides lithium mining that are profitable as well.”
Automotive supplier Aptiv (APTV) is Fundstrat’s supplier pick. The company makes electrical components as well as self-driving products. “It will benefit no matter which of the major OEMs end up becoming dominant in EV,” adds Fundstrat.
The research firm’s semiconductor company to play the EV trend is the giant Taiwan Semiconductor Manufacturing (TSM), with Fundstrat calling the company the “undisputed leader in the production of the leading-edge chips that are required for autonomous driving to be successful.”
Fundstrat’s self-driving play might surprise investors. It’s Tesla (TSLA). Tesla is, of course, the largest global maker of all-electric vehicles. But the company has also invested heavily in self-driving technology. “The company’s innovation-first culture has resulted in making major strides in the technological race that will bedifficult for peers to catch up to,” writes Fundstrat. “They have done a lot of the groundwork in autonomous driving and we think they will continue to be a leading company.”
That leaves Fundstrat’s auto-manufacturing pick: General Motors (GM). “GM is entering the EV world in a big way,” writes Fundstrat. The company is spending $35 billion between 2021 and 2025 to bring dozens of new EV models to market by then. “We think this is a revitalized firm with a viable strategy for EV growth.”
It’s an eclectic group. GM stock trades at 7 times estimated 2022 earnings. Tesla stock trades at 83 times. Over the past year, the group has returned about 5% on average. The S&P 500 and Dow Jones Industrial Average are up 19% and 16%, respectively, over the same span. For the five stock, only Albemarle and Tesla shares are up for the latest 12 months.
For Fundstrat, that just means the best is yet to come.
Write to Al Root at allen.root@dowjones.com
