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How To Invest In EVs (Hint: It's Not Tesla Or Rivian) – Forbes

Electric Vehicle in Park Charging station in UK Street
As the advisors below observe, there is little doubt that electric vehicles are an enduring trend. But the most popular names today may not necessarily be the best long-term investments. Here, a trio of newsletter advisors from the Cabot Wealth Network  — and contributor to  — caution against jumping on some of the more speculative names while highlighting some alternative picks in the EV space.
Bruce Kaser, Cabot Undervalued Stocks Advisor
We’re convinced that electric vehicles will eventually rule the road. A hundred years from now, the average citizen will wonder aloud when they think about how oil was used in the past… “you mean they actually burned that stuff!?”
Yet that future is not here yet, and we doubt that the pace of adoption will be anything like the optimists anticipate. In the U.S., about 3% of vehicles sold last year were electric vehicles, and these were subsidized by government tax credits and other benefits.
We’re watching with wonder how Tesla (TSLA), a $65 billion company in late 2017, is now a $1 trillion company and that Elon Musk, by himself, is worth more than all of ExxonMobil XOM (XOM).
While its future is exceptionally bright, Tesla’s stock valuation already discounts most of its coming prosperity. It is already worth perhaps twice the entire remaining auto industry. Surely it can’t garner a 70% implied share of all future industry profits, which its stock price implies? Its valuation has matched and then exceeded its position on the innovation curve.
Rivian Automotive (RIVN), which IPO’d on November 10, was recently the #3 most valuable car company in the world. The company as delivered 156 vehicles in its history and will probably lose $2 billion this year. This compares to Volkswagen (VWAGY) — the former #3 company — which will likely earn $15 billion this year on the 6.5 million vehicles it has delivered so far this year, which includes 300,000 electric vehicles. VW, no slouch in the high-performance EV segment, has delivered almost 29,000 Porsche EVs.
Rivian has orders for about 55,000 vehicles from individuals and another 100,000 from 20% owner Amazon AMZN (AMZN). The company says it can produce 200,000 vehicles a year, if it expands its current facilities, by perhaps 2024. That’s a long time to wait for what may be an outdated vehicle, especially when it takes only a $1,000 fully-refundable deposit to hold a retail order.
Looking at valuations, Rivian recently traded at $720,000 per vehicle produced (based on its 200,000/year target), while Tesla trades at about $500,000/vehicle (based on $1.0 trillion market value and 2 million units/year). On the news that Hertz (HTZWW) was ordering 100,000 Teslas TSLA , TSLA shares jumped 12%, adding roughly $120 billion of market value. Those incremental Hertz-Teslas were apparently worth $1.2 million per vehicle.
Dull giant Volkswagen (VWAGY) trades at about $12,700/vehicle produced, assuming a recovery to its normal 11 million vehicle volume. General Motors (GM GM ) is valued at about $11,500/vehicle, based on its $92 billion market cap and a normalized output of 8 million vehicles.
Is a Tesla in a few years really worth 43x a GM vehicle today? We certainly appreciate the reality of wider operating margins at Tesla (perhaps 25%) and the hope of wide margins at Rivian, as well as the absence of legacy pension and other liabilities, compared to margins of perhaps 10% at General Motors.
We also recognize the vast array of side hustles including battery production, insurance, fleet/ride-sharing, and other high-margin services that Tesla can provide, along with the cache of its brands. But we wonder if GM and VW really are that far behind in the EV transition and their ability to offer new services. Can the value gap be even reasonably justified? We think not.
But until the gravity of easy money and high speculation unravels, there likely won’t be much to pull the valuations together. And when they do eventually converge, it will be Tesla and Rivian becoming cheaper a lot more than it will be from GM becoming more valuable.
Timothy Lutts, Cabot Stock of the Week
This is a great sector to invest in, as revolutionary developments challenge the old guard of the industry. And it’s becoming increasingly clear which of these contenders will thrive and which are on their way to death or acquisition (most of those smaller electric manufacturers).
But which ones are worth considering for new investors in the sector today? My first picks include established companies with strong charts. Interestingly, they also provide global diversification through different countries.
Ferrari (RACE) stands out in this group with a price/sales ratio of 9.91, telling us investors value this company highly. And why not? Ferrari has a solid niche and is very profitable. Furthermore, quarterly revenues are up over the past two years, from $1.04 billion to $1.22 billion.
Ferrari has a very capable hybrid plug-in vehicle now and expects its first fully electric car to be available in 2025. As for the stock, it’s one of the few in the group that’s hit a recent high!
BYD (BYDDF) is the Chinese automaker long owned by Warren Buffett—and the third-most valuable auto company in the world, with a market capitalization of $109 billion. And the reason is growth. Quarterly revenues have more than doubled over the past two years, from $4.0 billion to $8.6 billion.
The company’s vehicles include internal combustion and hybrid vehicles, but there’s no question the company is pushing hard to serve the market for electric cars. The price/sales ratio (PSR) PSR is now 3.6, and the stock has recently hit a record high.
Tata Motors (TTM) has now owned the Jaguar and Land Rover brands for 13 years—but the past two years have been rough at the company (which also sells plenty of cheaper, more utilitarian vehicles in India), with revenues falling from $10.2 billion per quarter to $8.4 billion.
Both the company’s iconic brands have dabbled in electric models, but a new effort to invest $2 billion in electrification is expected to focus on the company’s mass-market vehicles. Valuation-wise, the stock is selling at a price/sales ratio of 0.59—and the stock is up from 4 at the bottom to a recent high of 35. Quite strong.
Carl Delfeld, Cabot Explorer
Relative to other EV plays, I believe that Ford (F) represents a better risk/reward idea that comes with several benefits.
First, Ford earlier made a capital investment in Rivian, which makes the current situation more interesting. Rivian has a market value of $105 billion, whereas Ford is at $81 billion. However, Ford made a $500 million investment in Rivian for a 12% stake, so its position is now worth $12.6 billion. Nice return.
Executives from both companies recently announced a mutual decision to focus on their own projects instead of jointly developing new models. This means they will be competitors rather than partners, thus essentially negating one of the reasons Rivian was so credible as an entrant into the EV marketplace. Meanwhile, Ford is forging its own path in the EV world.
Mr. James Farley, who took the top job as Ford’s CEO in October 2020, has accelerated Ford’s electric-vehicle plans. Ford’s strategic plan, outlined in May, has positioned the company as an aggressive player in electric vehicles, committing $7 billion to three new battery factories in Tennessee and Kentucky, along with a plant to build electric pickup trucks, as part of $30 billion in electric-vehicle investments planned through 2025.
Its Mustang Mach-E electric SUV, a competitor to the Tesla Model Y, is off to a strong start with about 22,000 models sold so far this year. Ford estimates global Mach-E demand could be 200,000 vehicles a year within the near future.
In addition, Ford has more than 160,000 non-binding orders for its electric F-150 Lightning pickup truck, which is scheduled to go on sale this spring. Ford plans to produce 80,000 F-150s a year. To do so, it has invested in its Michigan-based Rouge Electric Vehicle Center, Van Dyke Electric Powertrain Center, and in the Rawsonville Components Plant. The Ford F-150 Lightning is expected to have a starting price of just $40,000 if you get it without the bells and whistles and will have a range of over 300 miles.
Big picture, Ford plans to sell 600,000 EVs annually by 2023. By 2030, Ford expects to generate 40% of its revenue from electric vehicles (EVs).
Another plus is that Ford announced on November 18 that it had entered into a chipmaking partnership with U.S. based Global Foundries, which has operations all over the world to produce semiconductors. Ford has a big footprint of its own and is a quality brand in Europe, where there is a strong affinity for electric vehicles.
Furthermore, valuation matters in investing. Rivian is the high-flyer now but could be ahead of itself and has a lot to prove. Its product has a higher price point and it will not benefit going forward from the Ford collaboration.
Rivian will have basically zero revenue and profits in 2021 while Ford expects to earn between $4 billion to $5 billion in adjusted free cash flow (FCF) and $10.5 billion to $11.5 billion in earnings before interest and taxes (EBIT). The bet for Rivian assumes much higher growth and profitability than Ford going forward. We shall see.
Finally, Ford offers a balanced approach to investing in EVs — if electric vehicles in America do not take off in the coming decade as assumed (shortage of rare earths and metals, perhaps?), it will simply sell more regular cars.