Electric Vehicles: Building Boom or Bust?

The answer for the next 3-5 years will depend on where you live.

Electric vehicle sales are accelerating as component prices plummet, charging stations proliferate and favorable government policies worldwide ease consumers’ all-in costs.

No, they’re in the process of an historic bust: Despite heavy subsidy, charging remains problematic. Moreover, costs are no longer falling, government support is waning and consumer preferences are shifting back to gasoline-powered vehicles and hybrids.

If you’re a fan of “X” as I am (@Roger_Conrad), you’ve no doubt seen and heard plenty of opinions about EVs on both sides. As in the mainstream media, much of what you see is fact-lite and charged by energy politics rhetoric. But there’s also quite thoughtful commentary backed by reliable sources.

For investors, the stakes for deciding what to believe are potentially quite high. Despite dropping more than -30 percent year-to-date, shares of EV industry poster child Tesla Inc (NSDQ: TSLA) still sell for nearly 65 times expected next 12 months earnings. That compares to just 6.8 times for Ford Motor Co (NYSE: F), which is still best known for its ever-popular F-150.

Such a high valuation means a lot of room for disappointment and possible downside in Tesla shares, should the promise of EVs truly fizzle out. And the same is true up and down the value chain, from rival manufacturers to battery companies and miners of key resources like lithium and nickel—many of which have yet to generate a dollar of earnings.

On the other hand, it’s very hard to make a case that global EV sales are sputtering. For example, Tesla’s main competitors--Volkswagen, Hyundai, Kia, BMW, BYD and Ford--reported Q1 EV sales growth of 15-20 percent. That’s nearly three times the otherwise exceptional seasonally adjusted growth of automobile sales overall. And India has entered the game, with EV sales doubling in 2023.

Tesla reported a -8.5 percent decline in Q1 volume sales including -3.6 percent in China. EV sales in that country overall, however, grew by 10.5 percent. And “new energy vehicles” which combine both plug-in and battery EVs reached 42 percent of total Chinese vehicle sales in March. Rather, the company’s shortfall was due to fierce competition led by the country’s largest EV company BYD, which cut prices aggressively.

I’ve found much of what passes for investment opinion on Tesla is closely connected to its author’s view of ever-controversial co-founder and CEO Elon Musk. And that makes it sometimes difficult to find good information on the relative merits of the company, or the EV market for that matter.

Case in point: A Wall Street Journal article earlier this month, which harped on Tesla’s disappointing Q1 sales as evidence of an ongoing bust for both Tesla and EVs in general. The authors also generally dismissed Mr Musk’s explanation for the shortfall that the company’s product cycle is between the older Model 3 and Model Y, and a next generation of vehicles that includes the now launched “Cybertruck,” a “robotaxi” and a much lower-cost option.

But whatever Tesla’s growing pains so far—and admittedly they have been considerable—the business numbers tell a far different story from the WSJ’s assertion of an epic decline in progress. Mainly, this is the first US auto manufacturer to vault into the ranks of industry leaders in more than a century.

Tesla’s annual revenue of $96.8 billion in 2023 was still barely half that of Ford and GM. But sales were also triple what they were in 2020. And troubles in China notwithstanding, revenue is still projected to grow 8.4 percent in 2024, fueling a 14.4 percent EBITDA increase.

Tesla’s expected $4.3 billion in 2024 free cash flow would be after a record $9.8 billion in capital spending, as the company continues to expand global output and development. It would also be enough to retire the company’s entire $1.4 billion debt three times over.

I generally don’t recommend anyone pay 65 times expected earnings for a stock in what’s an inherently a cyclical industry like autos. But it’s undeniable that Tesla is the first-ever major US auto company with a 100 percent reliance on electric vehicles. And its credit ratings are just as high as GM’s and better than Ford’s.

Bottom line: The death of Tesla has been greatly exaggerated, and the same is true of the global EV sector overall. Both are here to stay until proven otherwise. And love him or hate him, it’s absolutely true that anyone betting against Musk in the past has ultimately been the poorer for it.

That said, EVs are going to supplement but not replace conventional automobiles for the foreseeable future. And to the extent there is a “transition” from gasoline to electric, the pace is going to vary widely around the world.

My money is on China as the top major country candidate for a relatively smooth and quick move to EVs. That’s for three main reasons.

First, China lacks sufficient domestic oil and gas resources to meet its still surging energy needs. Not switching its transportation fleet to EVs means deepening reliance on often volatile priced oil and LNG imports from countries it’s in economic competition with, such as Australia and the US—or alternatively expensive (and vulnerable) pipelines from Russia that run thousands of miles across hostile terrain. In contrast, moving to EVs means greatly increased economic independence and geopolitical strength.

Second, China has by far the world’s most scaled up and developed infrastructure for manufacturing EVs. That includes battery production, which reported 96 percent month-over-month growth in March. Bloomberg Intelligence now estimates the country’s share of global manufacturing capacity is “above 80 percent in 11 clean-tech segments.” Those include production of lithium, nickel sulphate and cobalt sulphate, as well as battery cells and battery electrolytes.

Third, China’s massive expansion of clean tech and battery production capacity in recent years has drawn the ire of politicians in the US and the European Union. They’ve charged growth is government-subsidized with the deliberate aim of hurting non-Chinese competition. And they’re threatening retaliatory action with new tariffs and other barriers to trade.

Some might rightly point out that the US and EU are also heavily subsidizing these industries. And as Bloomberg New Energy Finance data show, tariffs erected by the Trump Administration and doubled down on in the Biden Administration already cause Americans to pay several times more for these products including batteries than Chinese business and consumers do.

I’ll leave the geopolitical arguments others. But the upshot is higher tariffs and trade barriers the next few years are far more likely than lower ones in the US and EU. That means Americans and Europeans are going to pay a lot more for EVs than the Chinese will—with the certain result of more inflation and slower adoption than in China.