Tesla Inc (NASDAQ: TSLA) stock is unattractive at current levels for several reasons. Most important, investors should avoid Tesla stock because the company’s valuation is sky-high and it doesn’t make a profit.
As Barron’s pointed out recently, the valuation of Tesla stock is excessive, even if the company manages to meet the expectations that most analysts have for it. Or, in other words, as I mentioned in an earlier column, “TSLA stock is pricing in mass adoption of the company’s vehicles,” even though there is as yet no concrete sign that such a development will occur.
Moreover, Tesla is not even close to turning a profit, as it reported a second quarter per share loss of $1.22, and even an analyst who’s relatively optimistic about the company’s prospects isn’t sure that it will be able to generate positive cash flow in 2018. Meanwhile, two pretty tough competitors—BMW (OTCMKTS:BAMXF) and Tata Motors Limited (NYSE: TTM) (ADR)’s Jaguar—plan to dramatically increase their EV production. Plus, some buyers of Tesla vehicles may soon not be able to qualify for the full $7.500 EV tax credit . Add it all up, and Tesla stock looks quite risky at current levels.
But Morgan Stanley recently predicted that nearly 10 million new electric vehicles will be sold in 2025, up from less than 1 million this year. So what should you do if you want to invest in the EV boom but don’t want to touch the dizzying valuation of Tesla stock?
Better Plays Than Tesla Stock
Luckily, there are a few good EV stock plays. Specifically, Albemarle Corporation (NYSE: ALB) mines the lithium used to make electric car batteries, Panasonic Corporation (ADR) (OTCMKTS: PCRFY) manufactures the batteries themselves, and AeroVironment, Inc (NASDAQ: AVAV) sells charging systems for electric vehicles. And all three of the companies are profitable, with double digit P/E ratios.
According to Reuters, “demand for battery-grade lithium compounds is expected to skyrocket in the next decades in tandem with soaring demand for electric cars.”
One of the world’s four largest lithium producers, Albermarle, is getting ready for the boom. It plans to expand its production capacity to 165,000 tons, up from 89,000 tons this year, its spokesman told Reuters.
On August 7, the company reported stronger than expected results but did not raise its guidance. Two research firms, however, remained upbeat on the company’s outlook, with RBC Capital saying that the company’s pricing power should be boosted into 2018 by “favorable lithium supply/demand dynamics,” and Robert W. Baird predicting that the company would post “solid” results in the second half of this year.
Panasonic is partnering with Tesla to develop batteries for EV at the automaker’s “gigafactory,” so if Tesla makes the bulls’ dreams come true, Panasonic is also poised to benefit significantly. But like Albermarle, the company is well-positioned to benefit from great overall supply/demand dynamics. Also like Albermarle, it’s preparing to take advantage of surging demand by significantly increasing its capacity.
Bottom Line on Tesla Stock
Finally, like Albermarle, AeroVironment can exploit Tesla’s growth and the success of other automakers’ EV. The company sells home chargers that are compatible with Tesla vehicles but also partners with many other electric vehicle makers. Additionally, AeroVironment sells commercial chargers that can be deployed by commercial entities like hotels, retailers, airports and business parks. As electric cars proliferate, more and more of these establishments will look to install electric car chargers accommodate their customers/employees and show off their “green” bonafides.
Investors who are (rightfully) scared by the valuation of Tesla stock but want EV stock plays definitely should buy the shares of Albermarle, Panasonic, and AeroVironment. They are profitable, their valuation are reasonable, and the electric car boom should greatly increase their profits going forward.
As of this writing, Larry Ramer did not hold any shares of any of the companies mentioned in this article.