If there's one constant on Wall Street, it's that there's always a next-big-thing investment trend capable of changing an industry or revolutionizing the world. Throughout 2023, artificial intelligence (AI) captivated the attention of investors. But before AI dazzled Wall Street, it was the rise of electric vehicles (EVs) that garnered investors' attention.
According to a 2023 report ("X-Change: Cars") from the researchers at Rocky Mountain Institute (RMI), EVs are expected to grow from a little over 10% of total global car sales (as of 2022) to between 62% and 86% of worldwide vehicle sales by 2030. RMI's thesis is that economics will (pardon the pun) drive growth for EVs. Lower battery costs and improved production efficiencies can drive down the selling cost of EVs to match internal combustion-engine vehicles.
Based on estimates from Fortune Business Insights, we're talking about a market that could net almost $1.6 trillion in global sales come 2030, with a compound annual growth rate of nearly 18% leading up to the turn of the decade.
But while EV makers have the potential to deliver jaw-dropping growth, they're not all going to be winners. As we depress the accelerator into 2024, one EV stock stands out as a phenomenal buy, while two other widely owned EV companies are best avoided by investors.
The EV stock to buy hand over fist in the new year: Nio
The one electric vehicle stock that stands out as an exceptional value in 2024, and for many years to come, is China-based Nio (NYSE: NIO).
The biggest knock you'll find with Nio is that the company is still losing money. With very few exceptions, losing money is the norm for pure-play EV manufacturers. Losses are certainly something to consider when valuing EV stocks since ramp-up costs related to everything from innovation to infrastructure can be sizable. Wall Street analysts don't expect Nio to turn the corner to recurring profitability until 2026.
The flipside to this concern is that Nio is well capitalized. It ended September with approximately $6.2 billion in cash, cash equivalents, and various restricted cash and short- and long-term investments. Furthermore, it closed a $2.2 billion equity investment from CYVN Investments on Dec. 27. Nio should have more than enough capital to expand its production and continue innovating.
Speaking of production, Nio is decisively benefiting from Chinese regulators lifting the country's controversial zero-COVID mitigation measures in December 2022. China's attempts to mitigate the spread of COVID-19 led to unpredictable lockdowns and sustained supply chain issues. While the world's No. 2 economy is still working through some of these kinks, Nio delivered roughly 37,500 more EVs in 2023 than it did in the previous year.
But the Nio investment story is really all about innovation. This is a company that's consistently introducing at least one new EV annually, as well as refreshing its previous models. For example, shifting to the NT 2.0 platform, which provides much-improved advanced driver assistance systems compared to the previous platform, generated a discernible uptick in sales of the company's higher-margin SUVs in the second half of 2023.
Nio's out-of-the-box innovation should come in handy as well. Beginning in August 2020, Nio introduced its battery-as-a-service (BaaS) subscription as a way to keep early buyers loyal to the brand. Although the dynamics of battery swaps and upgrades have changed a bit since Nio introduced BaaS, it's likely aided the company's ability to attract and retain buyers.
EV stock No. 1 to avoid in 2024: Lucid Group
However, not every company involved in a next-big-thing trend is going to come out smelling like a rose. The first EV stock for investors to avoid in the new year is Lucid Group (NASDAQ: LCID).
On paper, Lucid should have well-defined competitive advantages in the EV space. The company's core product, the Lucid Air sedan, starts around $75,000 (with tax credits) and can cost close to a quarter of a million dollars with all available bells and whistles added. With Tesla (NASDAQ: TSLA) de-emphasizing the luxury Model S to focus on mass-producing the more-affordable Model 3 sedan, the luxury end of the EV sedan market appears ripe for the taking. Unfortunately for Lucid, it's failed to capitalize.
One plain-as-day problem for Lucid is rapidly rising interest rates. Since March 2022, the Federal Reserve has increased its federal funds target rate by 525 basis points. This has coerced some prospective buyers to forgo luxury brands in favor of less-costly vehicles.
Lucid is doing itself no favors in the production department, either. Heading into 2022, Wall Street anticipated it would produce 20,000 EVs. When the curtain closed, the company had produced just 7,180 EVs. The same issue occurred again last year. After offering initial guidance of 10,000 to 14,000 EVs for 2023, the company slashed its production forecast following its third-quarter operating results to a range of 8,000 to 8,500 EVs. While the company noted its guidance is designed to "prudently align with deliveries," rising inventory levels have been a problem for Lucid.
Though Lucid Group closed the September quarter with a little over $4.4 billion in cash, cash equivalents, and short-term investments, it's hemorrhaging cash as its attempts to ramp up production and build out its infrastructure. Even with a meaningful uptick in net-interest income, the company's net loss swelled to $2.17 billion through the first nine months of 2023 from $831 million in the comparable period of 2022. Unlike Nio, Lucid's funding situation is a bit more concerning.
The final issue has to do with delays in bringing the Lucid Gravity SUV to market. While it's due to hit the road in late 2024, it was initially expected to make its consumer debut in 2023.
EV stock No. 2 to avoid in 2024: Tesla
The other EV stock that investors would be wise to avoid in 2024 is none other than the largest automaker in the world, Tesla.
I'll certainly give credit where credit is due. Tesla is the first automaker to have successfully built itself from the ground up to mass production in well over a half-century. It's also the only pure-play EV producer that's currently generating a recurring profit based on generally accepted accounting principles (GAAP). When Tesla reports its fourth-quarter operating results, it should deliver its fourth consecutive year of GAAP profits.
But this is where the Tesla praise stops and the reality check begins.
Last year, Tesla slashed the sales price on its four production models (3, S, X, and Y) on more than a half-dozen occasions. While shareholders had hoped these price cuts were a reflection of Tesla's improved operating efficiencies, those dreams were dashed during the company's annual shareholder meeting in May.
At that meeting, CEO Elon Musk confirmed that his company's pricing strategy is based on demand. More than a half-dozen price cuts suggest EV demand is weak and that Tesla's inventory levels are rising as it boosts production. On a trailing-12-month basis, through Sept. 30, Tesla's operating margin has been cut by more than half to 7.6%.
The quality of Tesla's income also needs to be called into question. In the September-ended quarter, Tesla generated $2.045 billion in pre-tax income. This included $554 million in automotive regulatory credits given to it for free by governments, as well as $282 million in net-interest income. Framed another way, 41% of Tesla's pre-tax income can be traced to unsustainable sources. This is worrisome given that Tesla stock trades at a lofty 63 times forward-year earnings.
Lastly, Elon Musk is a tangible risk when investing in Tesla. While he's lauded as a visionary by shareholders, he's also consistently overpromised and underdelivered on a number of innovations. For example, he's claimed that Level 5 full self-driving is "one year away" for a decade. If these unfulfilled promises begin to unwind, Tesla's share price could tumble in 2024.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio and Tesla. The Motley Fool has a disclosure policy.
1 Electric Vehicle (EV) Stock to Buy Hand Over Fist in 2024 and 2 to Avoid was originally published by The Motley Fool
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