Editor’s Note: This article is a part of our “If You Only Buy One Stock” series where we look at 2021’s most popular investing trends and have our top financial journalists make their very best pick. Click here to see more names for your must-buy list.
Electric vehicles (EVs) have taken the world by storm. EVs are right at the center of a societal shift towards cleaner energy. There’s also the rush toward autonomous driving and connected cars, making now the right time for electrification. And the market for tech stocks in general is booming, offering abundant capital to new EV start-ups.
As a result, the stock market is now flooded with EV firms. By one count, there were more than 20 pureplay EV stocks by the end of 2020 and the number has surely risen more this year.
The rise of special purpose acquisition companies (SPACs) has made it easy for new EV players to go public with little more than some conceptual vehicle sketches, a well-known investor and hopes of revenues starting in 2023 or 2024.
Amid the flood of EV companies, it’s important to use a strict quality filter. As we’ve already seen with firms such as Lordstown Motors (NASDAQ:RIDE) and Canoo (NASDAQ:GOEV), SPACs can run off the road within months of their mergers closing date. It’s easy to make a snazzy pitch for a SPAC, but it’s much harder to convert that business plan into real-world results.
Filtering The EV Field
If you could only own one EV stock, there’s a few attributes you would want to look for. Starting off, you’d probably want a stock that already generates meaningful revenues. Investors have gotten burned over and over again with pre-revenue stage SPACs in recent months.
Some of the pre-revenue firms like Lucid (NYSE:CCIV) and Fisker (NYSE:FSR) look promising. They might make sense as a more speculative allocation in your portfolio. But, if you could only own one EV stock, you’d probably want one that has proven demand for its vehicles.
Next up, you’d want an EV company that can become an industry leader. There’s a ton of EV firms focusing on a niche, such as making the best truck, off-road vehicle and so on. Those could all be successful. However, if you’re picking just one EV name, you want one that can build a whole platform of EVs from compact cars up through at least SUVs. That is to say, if you want to supplant the traditional big auto makers and earn a corresponding large valuation, you need to offer a broad product line-up.
With those criteria, we’ve whittled down the list of competitors pretty significantly. Tesla (NASDAQ:TSLA) might seem like the obvious choice. And you could certainly do much worse. However, with a market capitalization around $700 billion already, how much upside is left for TSLA stock in the near-term? It’s the U.S.’ sixth most valuable company as is, so I’d pass on Tesla because the upside story has already played out.
If not Tesla, how about Nio (NYSE:NIO)? Nio has enjoyed an incredible turnaround over the past year. At one point, NIO stock traded for less than $3 per share and appeared to be running short on cash. Now, it’s a high-flying stock and its sales are back on a healthy upward trajectory.
Still, Nio’s high overhead costs and questionable capital allocation decisions should give investors pause. Of the Chinese EV makers, I see a much clearer upside case for XPeng (NYSE:XPEV). That said, if I’m picking just one, it has to be …
My Favorite EV Stock: Li Auto
Li Auto (NASDAQ:LI) has several key features that elevate it over rivals. For one, it debuted via an initial public offering (IPO) rather than a SPAC. This means LI stock had to do a traditional roadshow and endure the thorough underwriting process from investment banks.
It’s unlikely that something like Nikola (NASDAQ:NKLA) — with no revenues and a questionable history around its vehicle prototypes — could have made it through a normal IPO. The SPAC process allows fledgling companies to cut several key corners of the process, leading to wildly uneven results.
Unlike many EV firms, Li also already has a large operating business. For the fourth quarter, Li generated $635 million of revenues and actually turned an accounting profit; those are a rare breed in the EV space. Nio, for example, despite being larger and more famous, is still producing losses.
LI stock can credit its success to focusing on launching one vehicle with great success. Its hybrid electric SUV has become the top seller in its space in China. Just over the past year, deliveries rose from 2,896 in Q1 to 14,464 in Q4, showing Li’s amazing growth trajectory. Analysts see this continuing at a rapid clip going forward.
Li’s vehicle also comes with an attractive feature. It has a small on-board combustion engine as well which can be tapped as needed. Combined with the electric, it can hit a range of nearly 500 miles. This makes the Li vehicle greener than most rivals, while still making it a viable option in areas where charging networks are underdeveloped. This hybrid model is the same general concept Hyliion (NYSE:HYLN) is running with. However, unlike Hyliion, Li has already demonstrated substantial commercial success with its product.
While Li may not be the most glamorous EV investment, it is the most appealing one for long-term investors. The company has established credibility, built up an admirable market leadership position in SUVs and is already generating profits. That puts LI stock in a strong position as the EV market evolves.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.