If you want to invest in electric cars, there are two ways to get in on the action:
- Invest in electric car components.
- Invest in companies that make electric cars.
These are the two choices available to you as an investor interested in electric vehicles (EVs). If you’re like most investors, you’ve probably had the idea to invest in EV manufacturers. That’s the obvious play, but it may not be the best one. Because everybody knows about EV stocks, such stocks trade at steep valuations. EV component stocks, such as battery stocks, are often much cheaper. In this article, I will explore the case for investing in battery stocks, and contrast it with the case for investing directly in EVs. Hopefully, this contrast will help you decide which category of asset is better suited to your portfolio.
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The case for battery stocks
The case for investing in battery stocks over EV stocks rests on the fact that battery stocks are typically cheaper than EV stocks, because they aren’t well known. When I say “battery stock” here I’m really referring to Lithium miners, as EV battery manufacturing is mostly done by the big EV manufacturers. Lithium miners extract and sell the lithium that is used in EV batteries. There is already a big and lucrative market for lithium for use in smartphones and laptops. EVs, which use far more lithium than those devices, will take the lithium market to the next level.
As an example of EV battery stocks, consider Lithium Americas Corp (TSX: LAC). It’s a Canadian lithium miner that explores for lithium, primarily in the United States. It owns mining rights in Thacker Pass, a large, lithium rich area in Nevada. The company is a young one, and it isn’t generating revenue yet, so some valuation methods aren’t available for it. However, it does score pretty well going by the price/book ratio. This ratio for LAC is just 4.6, which is comparatively low for companies involved in the battery industry. I wouldn’t recommend running out and buying LAC just yet, but once it starts generating revenue it may be a company worth investing in.
The case for EV stocks
The case for investing in EV stocks instead of battery stocks rests on the fact that they are already profitable and growing. Many of the lithium mining stocks that investors are excited about aren’t even generating revenue yet. As such, they’re very speculative. EV stocks, in contrast, are in many cases profitable and growing.
Let’s take a look at Tesla Inc (NASDAQ: TSLA), for example. It’s a U.S. EV manufacturer that does over $90 billion in annual sales. In the last 12 months, it did:
- $95 billion in revenue, up 28%.
- $19 billion in gross profit.
- $10.7 billion in operating income, down 13.5%.
- $10.7 billion in net income, down 4.5%.
It wasn’t a great showing. However, it was good enough to show that Tesla is a going concern that can give wealth to its shareholders. That may be an advantage over small cap battery stocks.
