As the cost of gasoline shocked drivers over the past several months, electric vehicles (EVs) were suddenly part of everyday conversations. The electric transportation economy is a fact of life as new consumers, businesses, and municipalities discover its benefits. With their mainstream status, EVs are now recognized as a growth sector.
EVs are gaining popularity and market share. Vehicles that run on batteries accounted for 5.6% of new car sales from April through June, still a small segment of the market but double the same period last year, according to Cox Automotive, an industry consulting firm. In addition to gas price hikes, clean energy, improved performance, and government incentives are inspiring people to step into the world of all electric transportation.
More and more countries are implementing policies to fight climate change, and EVs are an important part of the conversion. Estimates and opinions on the EV market vary, but it is a done deal that sales of battery powered cars will increase in the coming decade. Automakers across the globe are making up for lost time to electrify their vehicle lineups, and this enormous task requires legacy automakers to reconceptualize their operations and shift into a technology mindset.
Automobiles fueled by carbon emitting fuels will remain a big part of the market for some time, but, as Forbes argues, pure play EV stocks are making a major impact in markets.
What is a Growth Industry, Anyway?
High growth industries are characterized by increasing intensity of competition, as new players who eye growing demand enter into the industry. Differentiation, brand building, and product proliferation are not only key to competing in such high growth industries but also to creating barriers to entry to prevent more newcomers from entering. Having the necessary capital for the expansion and implementation of refined strategies is imperative for any reliable growth sector industry. Without the financial resources to sustain different value chain activities, lasting viability becomes in doubt.
Key indicators for a growth industry tend to result from the following developments:
- Diversification. Investors tend to look for portfolio diversification beyond “long-only” investment funds. EVs can provide portfolio diversification to investors through exposure to a broad range of assets and risks.
- Absolute returns. Investors do crave absolute returns on investments, whether realistic or not. Most traditional investment funds try to beat market averages such as the S&P 500 index, claiming excellent management skills if their fund outperforms the relevant index. EV stocks continue to fluctuate in value.
- Increased institutional investing. It helps to see university endowments, for example, achieve patterns of returns from investing in what had been recently viewed as alternative assets. As universities begin to purchase EV fleets, it is likely their endowments will look to EVs for investments, too.
- Favorable market environment. When markets are favorable, growth sectors capitalize on available credit and low interest rates in combination with accommodating tax and regulatory conditions. Right now, however, the Dow is a bear market. Then again, Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”
- Human capital growth. When some of the best financial and investing talent in the world endorse EV stocks, others, like independent investors, tend to follow.
EVs as Anticipated Growth Sector
Edison Electric Institute (EEI) reminds us that the EV market has accelerated rapidly. The first major milestone of one million cumulative EV sales was achieved in 2018, more than 8 years after the introduction of the first mass market EVs in late 2010. Fewer than 3 years later, the next milestone of two million in cumulative sales was achieved in mid-2021.
EEI’s June, 2022 forecast of EV sales and the charging infrastructure through 2030 holds great promise, as 4 independent agencies have concluded that:
- The stock of EVs (i.e., the number of EVs on U.S. roads) is projected to reach 26.4 million in 2030, up from 2.4 million at the end of 2021. This is more than 10% of the 259 million cars and light trucks expected to be on US roads in 2030.
- They project the next one million EVs will be sold before the end of 2022.
- Annual sales of EVs will be nearly 5.6 million in 2030, reaching nearly 32% of annual light duty vehicle sales in 2030. This is an increase of more than 1.8 million in annual sales in 2030 in comparison to 2018.
- The availability of EV charging infrastructure also is fundamental to the growth of EVs. 12.9 million charge ports will be needed to support the projected 26.4 million EVs that will be on US roads in 2030.
- Approximately 140,000 DC fast charging ports will be needed to support the level of EVs expected to be on the road in 2030.
EV Automakers Already Part of a Growth Sector
The increasing number of competitors in the EV growth sector is likely to trigger price wars, as it seems GM is hoping with its An EV for Everyone campaign with its $30,000 Equinox.
In a year that has seen high flying technology stocks with lofty valuations battered, Tesla shares have emerged as an unlikely rival to Apple. Yahoo’s financial segment says that, of the 5 biggest US companies by market value, Tesla’s shares are by far the most expensive, yet they’re the only ones whose performance comes close to Apple’s, which has been a rare bright spot for investors in the sector this year. Tesla is down 22% this year while Apple has fallen 15%. By contrast, Microsoft, Alphabet, and Amazon have all declined 29% or more, roughly the same as the Nasdaq 100 Index.
The Fool says that, with so many things changing and money flows shifting to new auto suppliers, there are opportunities for investors to make some money in EVs as a growth sector. Patience and time, though, will be required.
Their analysts focused recently on the newest Volkswagen ID.4 which is about to hit US markets and will retail for “a very reasonable starting MSRP of $41,000” — significantly lower than the Tesla Model Ys starting around $67,000. The ID.4 price tag will be additionally appealing if US consumers can qualify for the new $7,500 tax credit. The Fool sees Volkswagen as “a cheap way to play the EV transition, with a cheap stock, a hefty dividend, and a potential catalyst in the Porsche IPO on the horizon — and the preferred shares are even cheaper if you don’t care about voting rights.”
The semiconductor market, as ancillary to EVs, is also becoming hot. Microchips control the engine, the navigation system, and in-dash infotainment features. They collect data from sensors in the engine and around the car’s body, analyze that data to adjust the vehicle’s performance, and regulate cruise control. Automotive chips are so crucial to the manufacturing of new cars that a shortage of chip making capacity has limited the supply of new cars in the last couple of years. There’s hope, though, as consumer demand is running high and automakers are accepting slow chip deliveries without canceling orders.
All in all, EV sales are on the verge of revolutionizing the auto industry. Investments in infrastructure and research and development, strong policy support at national and municipal levels, and coordinated global action taken today will determine if EVs can reach their full potential in the next decade.
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