In the midst of a very challenging investing landscape, last week Tesla (TSLA) reported earnings that impressed the market.
Automotive revenue reached $16.86 billion, up 87% from the same period last year, with a reported gross profit of $5.54 billion.
With many governments mandating a shift to zero emission vehicles and even laggard legacy automakers going all in, the stage is set for ongoing strength in the sector.
The global electric vehicle (EV) market could grow 24.3% annually from $287.4 billion in 2021 to $1.3 trillion in 2028.
For those captivated by this investing trend, TSLA is of course top of mind…
However with its already high market cap over $900 billion and looming competition, this article will outline three ways to invest in the EV boom that doesn’t involve buying Tesla stock!
Buy the competition
Tesla was certainly the first mover, but it’s clear they are no longer alone.
Rivian boasts some high-profile backers, including Amazon.com Inc. (AMZN) and Ford, and they began delivering their first R1T electric pickup trucks in December.
Perhaps even more interesting in my view is that Bloomberg recently reported that Ford is planning to spend an additional $10 to $20 billion over the next 5-10 years on top of the $30 billion they have already pledged to spend on EVs by 2025.
Going head to head with Rivian, demand for Ford’s upcoming F-150 lightning has been particularly strong, with 200,000 preorders for the electric version of the pickup, compared to 71,000 orders for the Rivian R1T.
If we zero into the small-cap segment of the EV market, it’s been nothing short of a bloodbath, with many stocks down over 70% from all-time highs.
While most attention in the EV space has been on consumer vehicles, commercial demand is rising quickly in lockstep.
According to a research report by Market Research Future, the market size of the commercial segment is projected to be worth $315.57 billion by 2030, registering a CAGR of 34.71%.
I have found two small-cap stocks focused on commercial EV’s that have taken a beating, though currently sit with analyst “Strong Buy” ratings and more than 100% implied upside potential each.
For European exposure we have Arrival Ltd. (ARVL), a British electric vehicle manufacturer. Arrival primarily manufactures lightweight commercial vehicles, and they pride themselves on creating a unique system of micro factories that allow for local production of EV’s.
Though they haven’t reported audited financials yet, they forecasted an adjusted EBITDA loss for the year between $162-172 million and no revenue.
At a $1.41 billion market cap, there are clearly high expectations for this company to grow.
Secondly, Xos Inc (XOS) is an American manufacturer of fully electric, zero-emission medium and heavy-duty commercial vehicles, powertrain components, and charging infrastructure. Its proprietary battery system, the X-Pack, and modular chassis, the X-Platform, are purpose-built for medium- and heavy-duty commercial vehicles in the last-mile sector.
The company produced a relatively meager $5 million in revenue last year, and though they squeezed out a $23 million profit due to a reported “change in fair value of earn out interest liability and derivative instruments,” — their operations lost $53 million.
With a $475 million market cap, at first glance, I see this as the more attractive of your two.
However with such weight being put on future earnings potential, I would need to do an awful lot more research before committing to either stock.
Invest in scarce minerals
Battery metals appear to be one of the primary limiting factors in EV production, and prices of these precious commodities are skyrocketing.
At Tesla’s Q1 earnings call earlier last week, Musk told analysts that lithium production is a hurdle to meeting EV demand and quite literally urged entrepreneurs to get into the mining business.
“Right now, we think mining and refining lithium…appears to be a limiting factor, and certainly is responsible for quite a bit of cost growth in sales,” Musk said. “I think it’s the single biggest cost growth item right now.“
In fact, an index of global lithium prices compiled by Benchmark Mineral Intelligence has surged almost 490% in the past year.
As a response, at the end of March, President Biden authorized the use of the Defense Production Act to secure American production of critical materials such as Lithium, a boon for U.S. battery metal stocks.
Recently, shares of junior miner Lithium Corp. (LTUM) jumped more than 30% on April 13 after unsubstantiated reports that it and its Nevada brine deposits had been sold to Tesla, a rumour the company quickly denied.
Given its near term demand for Lithium, some analysts expect an acquisition of late stage development or an already producing mine to be the most likely target for a Tesla buyout.
Musk has more than once discussed the possibility of Tesla getting into the Lithium business to secure their own supply of this obviously critical element.
“Should management be serious about entering the lithium space, we think the most likely route would be an acquisition of an existing lithium company,” said Morningstar lithium analyst, Seth Goldstein.
Don’t pass on EV charging infrastructure
In spite of improved battery performance, “range anxiety” is still a top concern for those considering the switch to EV’s.
Last summer, the Biden administration made it a national goal to have electric vehicles account for 40% of all car sales by 2030, and if the U.S. is to pull off this transition, it’s going to need a lot more charging stations…
The U.S. has nearly 46,500 public fast chargers, but it will need at least 180,000 of them by 2030 to meet demand, predicts the International Council on Clean Transportation.
President Biden approved a $7.5 billion plan to expand charging network across the U.S., which will provide funding for deployment of EV chargers along highway corridors. This investment will support the current administrations goal of building a nationwide network of 500,000 EV chargers.
Blink Charging is an owner, operator, and provider of electric vehicle charging services. The company offers both residential and commercial EV charging equipment, and closed out its fiscal 2021 year with revenue up 236% YoY to $20.9 million.
In spite of the impressive growth, Blink lost $55 million for the year, or $1.32 per share.
Considering its market cap of just under $1 billion, this company has a lot to prove to justify such a lofty valuation.
Volta, another American electric vehicle infrastructure company posted annual revenue of $32.3 million, representing growth of 66%. Though higher annual revenue than Blink, they managed to lose $276 million ($4.10) per share!
No wonder they trade at 1/3 of the valuation ($358.6m market cap).
With $262 million of the loss coming from SG&A, rising from $44m the year prior, I’ll be keeping a close eye on initiatives to rein in spending before I put any
How am I positioning my portfolio?
Electrification is a theme that is definitely at the top of my mind.
All of these stocks I mentioned have earned a spot on my watchlist for further review, though I’m not prepared to purchase any of them at this point.
After a substantial sell off across the board, I’m certainly circling these companies as I wade through the carnage and see who has the best chance of a rebound.
Are you familiar with any of the small-caps I mentioned here? Reach out and let’s chat!
If I add any of these to my portfolio, I will certainly provide an update.
This newsletter is written by Kevan Matheson, Founder & CEO of Edge Investments.
Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion.
After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency.
In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems.
Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more.