It is always smart to build diversification into a long-term portfolio. Markets and sectors go in and out of favor, and it helps to keep some of your investments working at all times. This is even more important when building a portfolio within a specific sector.
Many see electric vehicles as the future of transportation, and it makes sense to have a hand in it now that the industry is booming. That, of course, is what propelled these stocks to unsustainable valuations in the excitement of the potential gains. Now, stock prices have fallen significantly from previous highs, offering a better opportunity to build a diverse mix of EV companies. Here are two that would be a good place to start.
Tesla: the valuation discussion
Tesla (TSLA -6.42%† is the undisputed EV leader and industry pioneer. But it took years for the company to mature. However, the stock rose before the company’s execution, leaving many people out of possession from a valuation perspective.
There was always the chance of failure, and even CEO Elon Musk said his company was out of business in about a month when it ramped up the mass production of the Model 3 in 2017. But Tesla kept going, and sales have skyrocketed over the past few years. year.
Now that the company itself predicts that production can increase by about 50% per year for a few more years, that turnover will also continue to rise. Tesla’s new factories being built in Austin, Texas and near Berlin should help the company achieve that growth rate.
If the company achieves 50% revenue growth this year, the stock would trade at recent prices at a price-to-sale ratio of less than 10. That’s not cheap, but a long-term investor doesn’t last just one year. Looking further afield, a 50% growth rate would quickly bring that valuation metric to a more reasonable level. And while the price-to-earnings (P/E) ratio is still extremely high based on net income of $5.5 billion in 2021, that too should decline as the company grows.
However, that also highlights one of the key risks for Tesla as an investment. Based on 2021 net income, Tesla’s P/E stands at over 130. So the stock price has already built in some of the company’s continued growth. That’s another reason why investors should frame any investment here for the long term.
Nio: extending his reach
Tesla’s new factory in Europe shows that the company sees that as a target market. But the first facility outside the US was built in Shanghai. There was a good reason for that too. China is the largest car market in the world and the government has supported the EV industry.
Nioz (NIO -1.32%† is one of the leading growing EV companies in China. It has recently surpassed its 200,000th vehicle delivery and entered the European market. Nio is not yet profitable, giving it a higher risk profile than Tesla, especially given the potential political risks unique to Chinese investments. But its established presence in China, along with a move to Europe, is giving it a foothold in what should be the biggest EV markets in the future.
In its 2021 global EV outlook, the International Energy Agency predicted that China and Europe will still be the dominant global EV markets by 2030, accounting for 65% of EV sales.
Nio is expanding its product line along with its geographic reach. It recently began delivery of its first sedan model. In addition to the luxury ET7, the mid-sized sedan ET5 will be launched later this year. A mass-market sub-brand has also been discussed by Nio’s CEO, and recent reports say the plan is getting closer to reality.
While both Tesla and Nio are risky investments, that’s part of investing early in a fast-growing industry. That’s why it’s also smart to hold a more diverse mix of stocks in that sector. One can help mitigate that risk by making incremental investments as the businesses grow successfully. Tesla and Nio are two stocks that are a great starting point for adding EV investments to a portfolio built for the long haul.
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