In recent months, electric vehicle (EV) stocks have become more and more popular. Tesla traditionally had been the go-to stock for investors to consider. Yet with the IPO of Rivian, as well as higher interest in companies like Lucid Motors and NIO, there are actually many choices for me to consider when buying top EV shares. The nature of the industry means that there could be high rewards, but also several risks that I need to look out for.
Pushing up valuations
The world is becoming increasingly conscious of the need to take more action to look after the planet. Insights from the recent COP26 summit tied in with many nations pledging more action in this regard.
One element of this is a push towards EV instead of traditional diesel or petrol cars. I think ESG investors have led the charge into top EV shares over the course of this year. This has pushed up valuations and seen exceptional returns from holding these stocks in just a short space of time. However, this is the first risk I see.
The valuations of some of the best-known EV shares could sound alarms. Tesla is an example I’ll flag up. The business is doing very well, with a recent 100,000 order from Hertz, along with strong quarterly results. This pushed the share price above $1,000 last month. Yet with a market cap of over $1trn (compared to Toyota at $300bn), this does look expensive. It also has a P/E ratio of 355.
A second risk that leads on from the first is that I think some people might be getting ahead of themselves with regards to major EV shares. Both Lucid Group and Rivian only expect to start getting vehicles out for delivery between now and early next year.
I understand that all of the designs and testing have been completed, but the companies don’t have any track record of mass production. Yet the share prices for these stocks have been heading significantly higher in the past week.
I think there’s a risk that the stocks don’t accurately reflect the business stage that these companies are currently at. As a result, these top EV shares could see a correction lower if the lofty expectations aren’t met during 2022.
The final risk I’d flag up is that this sector is going to see high competition going forward. These EV manufacturers are not the only ones in the game. As far as I’m aware, all other major car manufacturers have an electric vehicle out or are developing one. So in the years to come, consumers are going to have a lot of choice. This could dilute the market share of the specialist EV manufacturers.
I don’t want to seem that I’m completely pessimistic about the top EV shares. On the contrary, I’m actually considering buying Rivian shares. I think momentum is with this sector and I only expect the market to get bigger. At the same time, I do think it’s wise to be aware of the above risks so that I can make the most informed investment decisions.
Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.