Electric vehicle, or EV, stocks have taken investors on a roller-coaster ride in the last three years. Most EV stocks, including Tesla (NASDAQ:TSLA) experienced a massive pullback during the onset of COVID-19. However, these stocks gained momentum soon after to end 2021 at all-time highs. A challenging macro-environment again resulted in a sharp decline in the share prices of EV companies.
Despite the volatility associated with EV stocks, investors should understand the long-term prospects for these companies are quite remarkable. The global market for EVs is expected to touch US$858 billion by 2027, up from US$457 billion in 2023, indicating annual growth rates of 17% in this period, according to a Statista report.
Countries all over the world are also investing heavily to support the shift to battery-powered vehicles. For example, an infrastructure bill in the U.S. has allocated US$5 billion to build out a charging network, while another US$2.5 billion is allocated for grants.
Given the multiple secular tailwinds surrounding EV stocks, it makes sense to allocate a small portion of your equity portfolio toward these companies. Let’s see which EV stocks should be part of your portfolio in 2023.
The undisputed leader in the EV space, Tesla is valued at a market cap of US$660 billion. In the fourth quarter (Q4) of 2022, it reported sales of US$24.3 billion. While Tesla generates a majority of revenue from automotive sales, its other business lines, such as energy generation & storage, automotive leasing, services, and automotive regulatory credits, account for 20% of its top line.
Despite an inflationary environment, supply chain disruptions, and labour shortages, Tesla reported an operating margin of around 16.5% in 2022. It was much higher than its operating margin of 12% in 2021 and 6.2% in 2020.
Down 50% from all-time highs, Tesla is priced at 6.5 times forward sales and 52 times forward earnings, which might seem expensive. However, its leadership position and enticing growth metrics allow TSLA stock to trade at a premium.
Tesla has already created massive wealth for long-term shareholders and is up 8,000% in the last decade. While it will be impossible for Tesla to replicate these gains, it is well poised to outpace the broader markets in the upcoming decade.
Another EV stock that should be on your shopping list is Rivian Automotive (NASDAQ:RIVN). Backed by Wall Street giants such as Amazon and Ford, Rivian is valued at US$17.8 billion by market cap. At its peak, the market cap for Rivian stood at US$120 billion.
Rivian produced 24,337 vehicles in 2022, which was just below its target of 25,000 for the last year. At the end of Q3, Rivian had 114,000 pre-orders for its R1 vehicle in addition to the initial order of 100,000 EDV (electric delivery vans) from Amazon.
While Tesla reports consistent profits, Rivian is wrestling with massive losses, making it a high-risk investment. In the September quarter, Rivian reported sales of US$536 million, but its cost of sales stood at US$1.45 billion.
Its gross loss margin of 170% suggests it may take several years for the company to break even. Alternatively, analysts forecast Rivian to increase its sales from US$55 million in 2021 to US$5.26 billion in 2023.
RIVN stock is currently priced at a discount of 95% to consensus price target estimates.