Electric vehicle (EV) stocks have been plunging this year. The most famous EV marker in the world has lost nearly half its value this year, while other brands have lost 70-80% since January. There could be more pain ahead, as consumers retreat from big purchases of automobiles altogether.
However, this near-term pullback could be an opportunity to add some long-term exposure. Here’s a stock you should consider buying now and two others that you should probably avoid.
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Buy: Magna International
Canada-based contractor manufacturer and auto parts supplier Magna International (TSX: MG) might seem like an unlikely candidate for this list. But it’s perhaps the most underrated EV stock on the market.
Magna’s recent advancements in electric auto parts put it at the epicentre of the industry. No matter which EV companies dominate the sector, Magna is likely to come out on top in terms of revenue and stable growth.
The company’s management expects its electric drivetrain system to expand at 15% compounded annually over the next five years. Meanwhile, its battery enclosures should also see steady sales growth of 20% compounded annually until 2027.
Magna stock is down 40% year to date, but that’s better than most other EV and auto stocks in this bear market. It’s also the only stock with a reasonable dividend yield (3.5%) and a buyback program. The stock trades at just 21 times earnings per share and 0.40 times revenue per share. That means the stock has already priced in a recession.
Avoid: Tesla and NIO
Tesla (NASDAQ: TSLA) and NIO (NYSE: NIO) are probably the most well-known EV stocks on the market. This could be why these stocks declined the most when investor sentiment soured. Tesla has lost 44% of its value year to date, while NIO is down 61% over the same period. Both companies have red flags that investors should keep an eye on.
Tesla’s valuation has always been a primary concern. The stock trades at 81 times earnings per share and 11 times revenue. That’s far higher than most traditional automakers. Investors have justified this premium because of the company’s margins and staples growth. However, the company’s growth could come under pressure as we enter a recession.
Record inflation, higher interest rates, and looming job losses could dampen the demand for new cars. Analysts expect U.S. auto sales to decline in the third quarter of 2022. This trend could play out across the globe, which could mean slower sales for EVs and more tepid growth for Tesla. The current valuation doesn’t justify a lower growth rate for this company.
NIO faces the same risks as Tesla, but its problems are magnified. The company doesn’t have the same loyal customer or shareholder base as Elon Musk’s EV giant. That makes the stock more volatile. Meanwhile, NIO has less market share and more competitors in China which could dim its long-term prospects.
The company has lower growth (22% year over year in the most recent quarter) and lower gross profit margin (13%). That makes it less appealing than Tesla. However, the valuation is more attractive. NIO trades at just 2.7 revenue per share. This valuation could be justified if the company manages to secure a sizable chunk of the global EV market in the years ahead.
