Electric vehicle stocks are rising sharply in popularity. Trading platforms are reporting increasing numbers of shares being purchased in EV stocks. With this popularity in mind, I want to delve deeper and decide if I should add EV stocks to my portfolio.
EV stocks on the rise
The EV industry is currently booming. Last year, global EV sales grew over 40% to more than 3m vehicles according to Swedish consultancy EV-volumes.com. I believe the EV industry has strong long-term growth prospects and this is attracting investors to EV stocks. According to the International Energy Agency (IEA) at the end of 2020, there were approximately 10m electric vehicles on the road globally. The IEA believes this number should rise by 200% to 30m vehicles globally by 2030.
Sustainable investing is another hot topic right now. Many investors are looking to invest their money in sustainable and ethical companies. EV stocks tick this box too.
Tesla is one of the biggest names. I recently wrote about NIO, which is another major player. There are lots of other lesser known names too, such as Workhorse Group Inc and Li Auto Inc.
Should I buy EV stocks?
Sustainability and ethical investing aren’t high on my priority list for my portfolio. I am tempted by the growth potential of EV stocks. There are certain factors that are putting me off, however.
Firstly, competition is intense and hotting up among EV firms. There are lots of smaller start-ups popping up. All these firms are attempting to outmanoeuvre each other and offer a unique selling point. As well as newer EV stocks, traditional vehicle manufacturers are joining the EV race. Longer term, I don’t know who will be a good pick just yet.
Next, valuations seem to be quite bloated across EV stocks. Tesla is a prime example of this, in my opinion. It currently has a market cap of $600bn. I consider this very high compared to a traditional automobile firm such as Toyota, which has a market cap of approximately $250bn. Even smaller EV firms have market caps in the billions. This is despite the fact they’re not producing or selling any vehicles just yet. These valuations do not sit well with me.
One of the by-products of bloated investments means short sellers often target EV stocks. In simple terms, they expect them to fall. A lot of smaller firms in the EV industry have high levels of short interest. An example of this is Lordstown Motors, which has short interest of close to 50%. Short selling and short interest also puts me off.
There are positives and negatives to EV stocks. Enormous growth potential is always tempting but there are clear and apparent risks for me. A short-term issue affecting EV firms is the global semiconductor shortage. Semiconductors are essential parts of electric vehicles.
Overall, I would not be willing to invest in EV stocks for my portfolio just now. There are more negatives than positives in my opinion. I believe the EV market from an investment perspective is very raw. I will keep an eye on developments, however.
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Jabran Khan has no position in any shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021