Electric vehicle (EV) stocks started 2021 on a high, but have fallen since. At its last close, the Tesla (NASDAQ: TSLA) share price was down almost 22% from its January highs, while the NIO (NYSE: NIO) share price was down by 37%.
What the EV share price crash means
The way I see it, there are two ways to look at this trend.
One is that until January, there was an unsustainable rise in EV share prices. In one year, the Tesla share price has risen by 569% and NIO by 1,491%. And this is despite the latest drop in price.
Two, is that scorching growth in EV share prices was to be expected. There is a policy push towards cleaner vehicles. Also, EVs are now more price competitive than in the past. According to Direct Line, one of UK’s biggest car insurers, the lifetime cost of EVs is now actually slightly less than that of petrol cars. This means that EV share prices are likely to rise further over time. So the latest drop can be seen as an opportunity to buy these promising stocks when they are still down.
A bubble with some value
I think there is something to be said about both arguments.
There is no doubt that growth in EV shares’ prices was eye-popping over the past year. And this is despite the fact that all such stocks, except Tesla, are loss-making. Tesla too, just turned a profit last year for the first time.
To me, this looked like a bubble then. And it does now. Tesla, for instance, has a price-to-earnings (P/E) ratio of 1,064 times, according to Financial Times data.
At the same time, I cannot ignore the fact that there is so much potential in the EV industry too. This means that at least some EV companies will succeed in the long term.
What’s next for Tesla and NIO?
And that is where Tesla and NIO come in.
Tesla, the name most synonymous with EVs, has seen major growth in recent years. Since 2016, its revenue has grown at a compound annual growth rate (CAGR) of over 45%. With what appears to be its early mover advantage, its founder Elon Musk’s huge popularity, and the growing demand for EVs, Tesla is poised for greater growth.
China’s NIO has also seen some success. Its revenues doubled last year while its net loss halved. China is the world’s largest car market and according to a Deloitte report, half the cars there will be EVs by 2030.
If trade stress between the US and China continues, Tesla’s dominance in the Chinese EV market could dwindle, a space that can potentially be filled by NIO.
The takeaway for Tesla and NIO shares
For now, though, I think both their share prices are still quite steep. And the EV industry is at too nascent a stage to justify me buying them. I think there are other ways to invest in clean energy stocks besides just Tesla and NIO.
