EV stocks: what will they face in 2022?

This article is part of our 2022 Global Market Outlook collection, where we highlight the key themes, trends, and levels to watch on our most traded products. Please visit our 2022 Outlook hub page to view them all.

 

A snapshot of the electric vehicle market in 2021

The automotive industry has been plagued by an array of headwinds this year. Automakers have had to scramble for chips amid a global shortage, deal with rising cost inflation, and suffered significant disruption to their production thanks to lockdowns during the pandemic.

But the coronavirus crisis has also encouraged governments around the world to step-up investment in cleaner technologies as they strive to build back better, and, despite the huge challenges, demand for electric vehicles is accelerating as they continue to improve and become more competitive against traditional petrol-guzzling cars. In fact, data from EV-Volumes suggests over 6.4 million electric vehicles (including plug-in hybrids) were sold globally in 2021 – 98% more than in 2020.

Still, it is early days for the industry. Electric vehicles only account for a small proportion of overall car sales and make-up a fraction of the total number of cars on the world’s roads. This industry is still nascent and is only just getting started – and it will be a long road to maturity. For example, various scenarios outlined by the International Energy Agency suggest electric vehicles will still only account for anywhere between 7% to 30% of the global vehicle fleet by 2030.

The huge growth potential of the industry has captured the imagination of investors this year, particularly in the US where we saw Tesla cement its position as the world leader by becoming the first automaker to earn a market cap of over $1 trillion. In fact, Tesla is now worth more than the next nine largest automakers in the world combined. We have also seen newcomers like Rivian and Lucid demand lofty valuations since going public earlier this year despite only having just started production.

Meanwhile, their Chinese counterparts have failed to ignite the same level of excitement among the markets. The big three that are publicly-listed in the US – NIO, XPeng and Li Auto – produce significantly more cars than either Rivian or Lucid and operate in a much bigger market, but offer lower valuations.

Let’s explore some of the key trends to consider as we enter 2022 and consider how valuations could fare this year.

 

When will the global chip shortage end?

One of the biggest problems to hit the automotive industry this year has been the global shortage in chips. Cars require a lot of chips to control everything from the brakes to the electrics and newer models are becoming increasingly reliant upon them as they become smarter and kitted-out with more technology.

We have seen several traditional carmakers cut production this year after being unable to get their hands on the chips they need, including Ford and Toyota, but most pure-play electric vehicle companies have suffered less disruption and a number of them have managed to achieve record production levels during 2021. Still, it remains a major concern for the entire industry and will play a significant role in deciding how the market performs this year.

With the world becoming more reliant on technology, the only thing that will alleviate the shortage will be an increase in supply. The semiconductor industry has recognised this and major players including TSMC, Samsung and Intel have pledged billions of dollars of investment to expand capacity over the coming years – but this will take time to come online.

Read more: Top chip stocks to watch

Hopefully, we won’t have to wait long. Fresh capacity should start to kick-in in 2022. JPMorgan has said things should start to improve in the middle of next year, while the CEO of HP has predicted the supply crunch will start to ease in the summer. Deloitte suggests as many as 29 new fabrication plants will get construction underway during 2021 and 2022 and that global capacity will be some 36% higher at the end of 2022 than it was in 2020.

It is worth noting that coronavirus could pose a threat. For example, a number of semiconductor plants, particularly in Asia, have suffered significant disruption when lockdown measures have been imposed over the past two years and any flare-up of a new variant or problems with vaccination programmes could cause further trouble for the industry in 2022.

Another important trend to consider is the number of companies taking more chip development in-house in order to wean themselves off relying on other businesses. Apple, long rumoured to plotting a secret electric car, has replaced Intel chips in its tablets and computers with its own and others including Amazon and Tesla have taken more control over the chips they use.

 

Competition in the EV market is set to intensify

Although countries from Canada to India have introduced policies and incentives to entice people to go electric, there are currently three major markets that dominate the space in terms of sales – China, Europe and the US.

So far, electric vehicle markets have become somewhat fragmented and insular. This means competition varies in each region. For example, there are thought to be twice as many electric vehicle models available in China compared to Europe, which in turn has twice as many models to choose from than in the US.

The standout is Tesla, which produces in both the US and China and sells in both markets plus Europe. Tesla is the only foreign firm featuring in the top 10 selling electric cars in China, with the rest all being domestic players. But more are set to expand outside of their home markets in 2022 which should intensify competition among pure-play electric vehicle stocks, with both NIO and XPeng plotting to enter a number of European markets this year.

Read more: The history of Tesla

Plus, we can expect a number of startups to properly hit the market in 2022. Rivian and Lucid are expected to begin ramping-up production this year, and other companies including Fisker and Canoo are hoping their first models will roll off manufacturing lines before the year is out.

And, don’t forget the traditional automakers. They have failed to convince markets that they are the ones to back as the world goes electric, demonstrated by the fact Tesla is worth more than Toyota, Volkswagen, Daimler, General Motors, Ford and BMW combined. Tesla has cemented itself as the world’s favourite electric vehicle maker in most major markets, but most of the other best-sellers outside of China come from traditional automakers like Ford, Volkswagen, Nissan and Hyundai.

Plus, traditional automakers are set to unleash a wave of new electric models in 2022, including Volvo, BMW, Mercedes, Citroen, Volkswagen, Audi, Hyundai, Porsche and Toyota. Virtually all of these companies have outlined ambitious plans to go electric over the next decade. Ford has arguably been the most confident by stating all sales will come from electric vehicles by 2026, but most plan to be making a majority of revenue from them by the end of the decade.

Data from the International Energy Agency suggests there were some 370 electric vehicle models available on the market in 2021, some 40% more than what was on the market in 2020. The combination of more electric vehicle stocks launching their first models twinned with the push being made by traditional carmakers to catch-up means competition is set to intensify in 2022 and beyond.

 

Are EV stocks overvalued?

Most of the pure-play electric vehicle companies remain deep in the red and are regarded as growth stocks, with value being assigned to their prospects rather than their current operations. This makes it harder to gauge what a company is worth but, in terms of predicted sales made in 2021, we can see valuations vary wildly:

	2021 Revenue Estimate	Market Cap	Ratio
Tesla	$51.11 billion	$970.5 billion	18.9x
Rivian	$70.2 million	$101.4 billion	1444x
Lucid Group	$83.8 million	$64.5 billion	769x
Nikola	$2.6 million	$3.9 billion	1488x
NIO	$5.6 billion	$53.5 billion	9.5x
Xpeng	$3.2 billion	$38.8 billion	12.2x
Li Auto	$3.9 billion	$31.4 billion	8.1x

(As of 14/12/2021)

It is hard to justify the huge valuations attached to the newer US companies to have entered the market, particularly when compared to the value being assigned to Tesla and traditional automakers (which also deliver profit). Meanwhile, the lower valuations on offer by Chinese firms can be partly explained by the fact competition in China is far more intense than in the US – at least for now.

However, turning to revenue forecasts for 2022, valuations look drastically different and far more tempered across the board (Rivian has been removed due to a lack of forecasts). While newcomers like Lucid, Rivian and Nikola will have much to prove in 2022, more established players already producing significant volumes look relatively cheap. This suggests that we could see another boom in valuations in 2022 should the industry meet the market’s expectations.

	2022 Revenue Estimate	Market Cap	Ratio
Tesla	$70.56 billion	$970.5 billion	13.7x
Lucid Group	$3.6 billion	$64.5 billion	17.9x
Nikola	$148.5 million	$3.9 billion	26.0x
NIO	$9.7 billion	$53.5 billion	5.5x
Xpeng	$6.0 billion	$38.8 billion	6.4x
Li Auto	$6.5 billion	$31.4 billion	4.8x

(As of 14/12/2021)

There is little doubt that the electric vehicle market has huge growth potential and is a long way from maturing, but this does not mean every company will be a winner. Deloitte has said the number of companies entering the market means the number of manufacturers is ‘unsustainable’. It also predicted that many electric vehicle startups will struggle to survive while those traditional carmakers that fail to adapt quickly enough could start to go out of business from 2030 onwards.

With this in mind, we can also expect M&A activity to pick up over the coming decade as companies look to consolidate a highly fragmented market and secure new advancements in technology – from batteries to self-driving capabilities – in order to secure their position in the market. This could also provide another catalyst for valuations. Markets should also expect a wave of new EV listings in 2022.

 

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Alternative ways to trade the electric vehicle market in 2022

Electric vehicle stocks are not the only way to trade the market and gain exposure.

One of the easiest ways to trade the market is using an Exchange Traded Fund (ETF), which allows you to spread risk by trading a group of equities rather than placing all your eggs in one basket by focusing on a single stock. For example, the iShares Electric Vehicle and Driving Technology ETF (ECAR) tracks the performance of manufacturers including Tesla, BYD, Ford and Daimler as well as suppliers fuelling the electric vehicle market such as chipmakers NVIDIA and Samsung and the likes of Eaton and Aptiv, which supply the likes of electricals and safety systems.

The ETF’s portfolio highlights that there are other sectors that are key to the market reaching its full potential that can provide alternative options for traders.

Ensuring charging infrastructure scales up as the electric vehicle market grows will be key to encouraging people to go electric and overcome any range-anxiety, and the opportunity will be huge over the next decade. For example, the number of charging points is expected to grow to over 2.9 million in Europe alone by 2030 from just 200,000 today. With this in mind, you can consider stocks such as Blink Charging, ChargePoint, Pod Point and SunPower Corp.

Batteries remain at the heart of any electric vehicle and the development of new and improved solutions will prove vital for the industry. Several companies are eagerly tinkering with the composition of batteries to make them both more efficient and cheaper. Big names like Panasonic and LG Chem are already major suppliers to the industry and there are a number of smaller firms like Microvast, QuantumScape and Romeo Power to consider too.

Falling further down the supply chain, there are also the companies producing the key metals needed to build both batteries and cars. S&P Global says an electric vehicle requires six times the amount of minerals needed to build a traditional car with a combustion engine, suggesting the market will drive growth in consumption of key metals used in batteries such as lithium, cobalt and nickel going forward. That brings miners like SQM, Gangfeng Lithium, Glencore and Vale onto the radar.

Read more: Top lithium stocks to watch

 

EV market 2022: What is the outlook?

The electric vehicle market will face huge challenges and opportunities in 2022. With most EV stocks coping with more demand than they can currently supply, the biggest hurdle this year will be overcoming inflation, the chip shortage and the threat being posed by Omicron to ensure they don’t fall behind.

The next 12 months is set to see another boom in electric vehicle sales, but the space is set to become significantly more competitive. Those already producing sizeable volumes like Tesla should maintain their lead, but rivalry within the market could make 2022 difficult for the number of EV stocks hoping to get off the ground and catch-up with market leaders – especially as traditional automakers start to pose a bigger threat.

There will be a lot of movement in 2022 and beyond. Not all EV startups will make it, while some traditional carmakers could fail to shift to electric vehicles in a timely or cost-effective manner. Rising competition and a greater need to capture the market and gain an advantage should fuel M&A in the electric vehicle market over the coming years, and we could see several new startups go public in 2022 as they seek to raise funds for development.

Valuations of companies making sizeable volumes could explode once again in 2022 if they can overcome supply chain challenges and continue to grow, but it could be a much more volatile ride for earlier startups that will have to deliver their ambitions over the next 12 months in order to maintain their lofty valuations. It is clear not every player will be a winner and investors need to ensure they back the right horse.