About a month ago, the world looked at California funny after the state finalized a law to ban the sale of new gas-powered cars by 2035.
Just last week, though, New York did the exact same thing. Gov. Kathy Hochul announced new legislation requiring all new cars sold in the state to be zero-emissions by 2035.
California and New York aren’t anomalies here. They are the start of a trend – a trend that implies you need to be invested in (and stay invested in) electric vehicle stocks.
Here’s the scoop.
The New Laws
Starting in 2023, both California (population ~40 million) and New York (population ~20 million) will have laws in place banning the sale of new gas cars in their state by 2035. That means that 25% of Americans now live in a state that plans to ban gas cars by 2035.
That’s meaningful.
But, here’s the real kicker. Due to its size and geography, California can set its own air quality standards, which are unique from those written by the federal government. Other states have the decision to either follow the federal standards or California’s standards.
A while back, 17 states signed on to abiding by California’s air quality standards.
That doesn’t necessarily mean all 17 will adopt California’s gas-car ban. But it does make a lot of sense for them to do so, especially since the largest of them – New York – is following in California’s footsteps.
Therefore, it’s reasonable to assume all 17 states will ban new gas car sales by 2035. If so, that means more than 33% of all Americans live in a state that is likely to ban gas car sales by 2035.
This is how the snowball effect works. One state does it. Then another and another until, eventually, it becomes the national standard.
We’re at the very beginning of this snowball effect for EVs. And that means we’re at the start of potentially enormous returns in EV stocks.
A Huge Addressable Market
Electric vehicles have often been in the news over the past several years. And because of that, a lot of investors assume that the bulk of growth in the EV industry has already happened.
That’s a false – and costly – assumption.
Globally, 70 million cars were sold in 2021. Only about 10% of those were electric. In the first half of 2022, that share has grown to 13%. Still, it’s a fraction of what it could be…
One-third of America is working toward 100% EV adoption by 2035. Pretty much every major automaker in the world is committed to electrifying more than 50% of their auto lineup by 2030, if not sooner. The EU is targeting a ~50% EV sales penetration rate by 2030. China is shooting for a 40% EV sales penetration rate by then.
This is a global movement, and all the global targets are a lot higher than the 13% rate we’re sitting at today.
Let’s be conservative. Say the global EV sales penetration rate hits 50% by 2035, well-below what most analysts, countries, and companies are targeting. Assuming the global auto market grows at its historically normal 3% annual growth rate into 2035 to 105 million vehicles, then total EV sales will number more than 50 million by 2035.
That is up almost 10X from 2021 levels!
It reasons, then, that EV stocks could soar 10X over the next few years, too. But given the presently discounted valuations in the market, we believe certain EV stocks could soar a lot more than 10X in the coming years…
Big Upside for EV Stocks
For a moment, do some mental math with me.
More than 50 million EVs will be sold every year by the early 2030s. The biggest automakers in the world today command about 10% of the global automotive market. It reasons, then, that the biggest EV makers of the early 2030s will command about 10% market share, too.
A 10% market share on 50 million EVs means the biggest EV makers will be selling 5 million-plus EVs per year by the early 2030s. Assuming a $50,000 average price tag on those vehicles (totally reasonable considering current pricing and inflation), that means the world’s biggest EV makers will be netting about $250 billion in annual revenues by the early 2030s.
Tesla (TSLA) has shown the world that, at scale, EV makers can operate at 30%-plus gross margins and 10%-plus operating margins. Therefore, the world’s biggest EV firms by the early 2030s should be $250-plus billion revenue firms with $25-plus billion in operating profits, or about $20 billion after taxes.
Over the past two decades, automotive stocks have historically averaged a 10X forward earnings multiple. Assuming EV stocks trade at a similar valuation multiple by the early 2030s, then the world’s biggest EV stocks will command $250-plus billion market caps within the next 10 years.
Tiny Market Caps
Yet, outside of Tesla, pretty much every EV startup today has a market cap of less than 10% of that.
Lucid (LCID) – the firm with the world’s highest-performance electric vehicle in the market today – has an enterprise value of just $21 billion.
Rivian (RIVN) – the company with the hottest electric pick-up truck and SUV on the market today – has an enterprise value of just $17 billion.
NIO (NIO) – the Chinese version of Tesla that’s dominating the electrification movement in the world’s largest auto market – is worth just $24 billion.
And Fisker (FSR) – the EV startup that is coming to market with the most economically sensible EV in the world – is worth just $2 billion.
These are all firms that could be titans of the EV industry by the early 2030s. They all could be worth more than $250 billion one day. Yet, today, none are worth more than $25 billion.
That means that in today’s sea of EV stocks, investors are hunting for several potential 10X investment opportunities.
The Final Word on EV Stocks
Full disclosure: We like Lucid, Rivian, NIO, and Fisker stock.
But none of them are the best way to play the Great EV Revolution…
Instead, that title is reserved for a tiny next-gen auto supplier stock trading for less than $5 today. That’s extremely cheap considering it is pioneering potentially the most important technological innovation in this industry.
It’s a stock oozing with potential – so much potential, in fact, that I’ve put together a presentation explaining why this stock could be your next big winner!
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
