I’ve touted Magna International (TSX:MG)(NYSE:MGA) as a great indirect play on the electric vehicle (EV) market before. However, I think this key secular trend deserves some additional attention. After all, with the stock prices of companies like General Motors rising substantially after the company agreed to produce only zero-emissions vehicles by 2035, this catalyst is in ultra-high gear right now.
The EV market will grow faster than many think
It wasn’t that long ago that many investors brushed off the nascent EV market. Companies like GM were simply too large to allow smaller players to gobble up market share. However, as we’ve seen with players like Tesla, this thesis hasn’t proven to be true.
Companies like GM are funneling billions of dollars to change this story. Indeed, the transition toward more EV options is good for humanity. I think this could also be a tailwind for Magna’s stock long-term.
We could see a demand spike in the next few years for EV vehicle replacements, driving this sector higher. It’s possible that higher levels of EV adoption and growth in this sector could actually boost overall auto demand numbers. With news coming out in recent weeks that large auto makers such as General Motors are planning a full migration toward EV production, this is bullish.
Magna’s goal will be to capture as much of the auto parts market for the growing EV segment as possible. Unfortunately, EV options have less pieces than cars with internal combustion engines, a potential headwind for Magna. However, if Magna is able to continue to acquire its way toward gobbling up a higher percentage of the EV auto parts business, the growth in this sector could eclipse this headwind.
Headwinds do exist
Magna is in a cyclical business, so this does provide some headwinds from time to time. Being the size it is, Magna’s core business depends on aggregate auto sales numbers.
Accordingly, investors need to take this cyclicality into account when looking at this stock. If this is a long-term hold, and one wants to buy on dips moving forward, great. If one is buying this with the hopes of some sort of Tesla-like stock chart over the next few years, this is not going to be that stock.
This is a stock that has seen a significant amount of optimism already priced into its stock. Indeed, given the cyclical nature of Magna’s business, the risks associated with this stock are elevated when it trades at these levels.
Personally, I’d caution investors to wait for a dip on this stock right now. At the very least, diversifying one’s cyclical exposure within a portfolio is a good way to play cyclical players like Magna right now. Those looking to see continued gains indefinitely are very likely going to be disappointed. The auto market is a fickle one and has always gone through fits and starts depending on the overall health of the average consumer and the economy.
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Fool contributor Chris MacDonald has no position in any of the stocks mentioned. David Gardner owns shares of Tesla. Tom Gardner owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Magna Int’l.