- The EV trend is here—that’s a certainty—but the question is, how big will it be?
- Another important question is how fast will the disruption happen?
- It’s interesting that the more real business strength an EV manufacturer has, the cheaper it is.
We all know one thing, electric vehicles (EV) will be the future.
Many countries don’t have oil and will do their best to switch to electric vehicles with the goal of lowering pollution which is a huge issue, especially in China.
Now, when you know that such a trend will develop over the next few decades, it’s a smart thing to be invested in it. This is similar to the healthcare boom that has evolved over the past 10 years. Those who were patient, and invested at the right time, reaped amazing returns from investing in the sector. The U.S. healthcare sector has returned 42% more than the S&P 500 in the last 10 years.
The reason behind such outperformance is the market’s myopic attitude. The majority of market participants are focused on what will happen next year and not on what will happen in the next 10 years. Such a bias creates amazing investing opportunities for those who are willing to look a bit beyond the next few quarters.
Now we know that the EV trend is strong, but also that the sector isn’t as simple as healthcare. Therefore, it’s important to find the investments that provide low or perhaps even no risk, but offer huge upside thanks to the strong trend.
The Strength Of The EV Trend
The are many different forecasts around the EV trend. Some are extremely bullish, while others are pretty conservative.
BYD, the Chinese EV manufacturing leader, forecasts EVs to completely take over the Chinese car industry by 2030. Germany has also announced that it will ban internal combustion engines by 2030, while France and the UK are thinking about 2040. But BYD Chairman Wang Chuanfu expects the shift to happen even faster than 2030 as new technologies will further disrupt the industry. However, not everyone is that optimistic.
In 2016, the number of electric cars in the world surpassed 2 million, which doesn’t even equal six weeks of car sales in the U.S., thus the global EV market is still small. Nevertheless, exceptions are that the total number of EVs will be between 50 million and 200 million by 2030.
However, all those forecasts are based on current data and if you just take a moment and think about what the expectations were back in 2002—just 15 years ago—the forecasts would have been completely different than they are today.
If there are more technological developments, and there likely will be, we can expect big disruptions in the above projections. As there are about 78 million vehicles sold per year, if by 2025, 50% of new cars are EVs, we would easily reach 400 million EVs, doubling the most bullish estimate today of 200 million.
The fact that EVs already have a 30% market share in Norway shows that we should really be ready for many more EVs on the roads.
In the worst case scenario, EVs only grow 25 times. In the best case scenario, EVs grow 200 times. Thus, there is definitely a positive trend and patient investors can position themselves to take advantage of the development.
The most important thing for the intelligent investor to look for is a no risk investment with huge potential. Given the long-term orientation, it’s possible to find such investments.
EV Trend Investments
I’ve already covered Tesla here, so I’ll first focus on the risk reward of the biggest global EV producer, which is partly owned by Warren Buffett, BYD Ltd (OTCPK: BYDDF), the Chinese EV manufacturer. The company has about $15 billion in revenues and what differentiates it from Tesla is that it has a net profit margin of 4.5% which is expected to decline by about 15% as the Chinese government ends all subsidies for EVs.
Now, what’s important is that BYD isn’t just an EV manufacturer, it produces handsets and Skyrail projects (commercial monorails).
Despite the decline in EV demand due to the loss of subsidies, BYD still manages to be profitable and also pays a small dividend. Therefore, it looks like a potentially stable investment if things don’t change. If the financial environment changes, BYD would have a hard time thanks to its $100 billion yuan of debt which is almost 200% of equity. Nevertheless, if the skyrail light technology gains more acceptance globally, and EV sales grow as the technology improves, BYD could give excellent exposure to the sector.
But, and there is always a but with the EV industry, given that the industry has really started gaining traction just in the last few years thanks to Tesla and BYD, the whole industry hasn’t really yet experienced a downturn which creates a discrepancy in valuations between pure EV producers and standard automotive producers. BYD has a net profit margin of 4.5%, a PE ratio of 36, and a dividend of 0.15%, while Daimler (OTCPK: DDAIF) has a net profit margin of 5.8%, a PE ratio of 7.8, and a dividend of 4.6%. The interesting thing is that Daimler plans to have 10 EVs in the market by 2020 which will standardize margins for most producers due to increased competition.
It’s incredible that the biggest companies in the industry have extremely low valuations with high dividends. The newer players, conversely, have a higher valuation the less market confirmation and past they have.
The unfortunate thing is that it will all boil down to margins, which will probably equalize over time. Thus, if you want to invest in the trend, try to focus on sentiment for quick gains if you are a trader while if you are an investor, focus on a healthy business model no matter what happens in the industry.
I’ll finish with this, Buffett invested in BYD in 2009 when BYD’s price was much lower and this shows how a real investor invests way ahead of the trend and really buys into it on the cheap. My favorite EV investment that is still cheap remains nickel.