Are electric vehicle stocks overvalued?

Jhe question of whether electric vehicle (EV) stocks are overvalued is a legitimate one. Just look at the performance of a title like You’re here (NASDAQ: TSLA) over the past few years to see why it is worth researching whether to invest in the sector.

Tesla shares have soared 1,800% over the past three years. In that time, Tesla has gone from a net loss of more than $860 million in 2019 to profits of $719 million in 2020 and an impressive $5.5 billion in 2021. This has proven itself. Investors now want to know which other electric vehicle companies could follow this path.

Image source: Getty Images.

Reason to be excited

Tesla has a dynamic and talented CEO in Elon Musk who has brought attention to his company and the electric vehicle industry. But it was the market he identified early on that really increased investor interest in electric vehicle companies. Global battery electric vehicle (BEV) sales have exploded over the past five years, with an annual growth rate of 47%.

Bar chart showing global battery electric vehicle sales from 2016 to 2021.

Global BEV sales have grown at an annual rate of 47% since 2016.

Tesla estimates that its own production volume will continue to grow by at least 50% per year for the next few years as well. Global sales of electric vehicles are expected to reach between around 25 and 45 million in 2030 according to the International Energy Agency (IEA). Tesla may continue to be the leader, but that leaves plenty of opportunities for other companies and their shareholders to take advantage.

Investment opportunities

There are many ways to invest in more Tesla in the future. Some of the stocks from these EV makers have also received a lot of hype. The valuations of American start-ups like Rivian Automotive and Lucid Group have soared even with still tiny vehicle production levels. Although revenues are just starting to flow for them, the two are valued at a market capitalization of over $40 billion. For perspective, Tesla initially crossed that valuation threshold in mid-2017, a year when its revenue topped $10 billion for the first time.

Much of the hype around EV makers outside the United States has focused on Chinese companies such as Nio (NYSE: NIO) and XPeng. Both have established electric vehicle businesses and have respectively shipped over 180,000 and 157,000 all-electric vehicles by the end of February 2022. Although not yet profitable, both were recently trading at price/ sales (P/S). less than 10 years old.

Hype versus results

This kind of valuation level can still be called hype, but the underlying companies are moving towards its justification. Ironically, China’s biggest EV maker is one that doesn’t get much hype and is reasonably valued by traditional metrics. BYD (OTC: BYDDY)the major Chinese automaker backed by Warren Buffett Berkshire Hathawayis profitable and its American Certificates of Deposit (ADR) trades at the modest P/S of just 2.7.

BYD is much more than just an electric car manufacturer. It makes traditional internal combustion vehicles, battery packs, and electric buses, making it a less pure game. That kept it somewhat under the radar of EV-focused investors.

So while some stocks are overhyped relative to the underlying companies at the current stage, the companies have plenty of room for growth. Sales of battery electric vehicles were only a small fraction of the more than 65 million automobiles sold worldwide in 2021.

Many investors believe Tesla is still an overvalued stock. But that didn’t stop the stock from continuing to rise as the business prospered. The hype comes from the fact that investors have no way of seeing exactly where the company’s growth might level off. This is also happening with other electric vehicle stocks, and companies that are successful over the long term should live up to that hype as they satisfy what could be massive market demand.

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Howard Smith owns BYD, Berkshire Hathaway (B shares), Lucid Group, Inc., NIO Inc. and XPeng Inc. The Motley Fool owns and recommends BYD, Berkshire Hathaway (B shares), NIO Inc. and Tesla. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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