Investing in the electric car revolution

While Australia is playing catch-up in the adoption of electric vehicles, many Aussie investors are already riding the global EV wave.

The global shift towards EVs and net zero emissions have accelerated investor interest in electric car makers like Tesla (TSLA) and the companies producing the metals and minerals used in EVs and batteries.

Morningstar forecasts EVs will reach 40% of global car sales by 2030, up from 3% in 2020.

The shift towards electric cars will play out over the decades to come and is a compelling opportunity for investors, according to Betashares senior investment strategist Cameron Gleeson.

"This trend will create winners and losers, both within the vehicle manufacturers themselves and amongst the different component makers within the automotive industry supply chains," Gleeson says.

"For Australian investors the growth potential and shifts within the industry represent a compelling long-term investment opportunity."

The EV stocks favoured by Aussie investors

EV market leader Tesla remains the most popular international stock on National Australia Bank's online trading platform, nabtrade director of investor behaviour Gemma Dale says.

"It is absolutely massive in that it has crept up the rankings to a point where it competes with a lot of very well-known Australian names in terms of interest and trading.

"It has obviously had interesting times and has been very volatile, but there are plenty of people who bought it early enough to have done extremely well out of holding it."

^{Morningstar forecasts EVs will reach 40% of global car sales by 2030. Picture: AP}

There has been some buying of challenger EV brands Nio (NIO), Lucid Group (LCID) and Rivian Automotive (RIVN) plus interest in copper and nickel stocks.

But Dale says the main way into the EV and decarbonisation story is through Australian lithium stocks.

Australia is the world's largest producer of lithium, a key component of EV batteries.

Lithium stocks have been hot, but have cooled recently with lithium prices falling in late 2022, on slowing Chinese EV demand.

Dale says trading in the lithium space has grown aggressively over the last two years, with much of the recent activity in Pilbara Minerals (PLS) and Core Lithium (CXO).

Some investors have taken profits, but many are in lithium for the long run, hoping to get outsized returns.

"It's obviously much less hot than it was because so many of those returns have already been made, but there are still those who believe that this is a decade or more story," Dale says.

"So, there's plenty of people who are excited to be on board and they're happy to keep playing it."

The Australian government is introducing fuel efficiency standards in a bid to boost the supply and uptake of EVs, which make up 3.8% of new car sales.

However, Dale says it is the global opportunity that excites investors.

"Australia is a really small market for cars and so you're not going to be placing all your bets in this sector thinking about the Australian market.

"You're thinking about Europe, the US, you're thinking long term about China and how all of the major global economies are trying to decarbonise fairly aggressively and how you get on board that story."

Tesla facing increasing competition

Tesla has cut the prices of its popular EVs to spur demand in an increasingly competitive market, causing a drop in profit margins in the first quarter of 2023.

^{Established carmakers, like BMW, are transitioning to EVs from internal combustion engines.}

Morningstar equity analyst Seth Goldstein says Tesla faces growing competition from traditional automakers and new entrants, but the market will expand as EVs rapidly take share from internal combustion engine vehicles.

"As new models are introduced, Tesla's technological advantage and the strength of its brand will remain intact, which will allow the company to continue to charge a premium price for its EVs."

While Morningstar has lowered Tesla's fair value estimate to $US215 per share, Goldstein says its long-term view on the EV maker led by billionaire Elon Musk is unchanged.

"We think Tesla's plan to reduce costs will drive long-term profit margin expansion."
Morningstar views shares in Tesla, which tumbled 65% in 2022, and BYD (01211), the largest new energy vehicle manufacturer in China, as undervalued.

Morningstar equity analyst Vincent Sun says BYD has benefited from robust demand growth in China but faces increasing competition from both local brands and global manufacturers.

"Legacy automakers, whether Chinese or global, continue to bring new electric models onto the market and compete on prices," Sun says.

Established car makers such as General Motors (GM), Volkswagen (VOW), Ford (F) and BMW (BMW) are transitioning to EVs from internal combustion engines. GM, for example, aims to only sell zero-emission vehicles globally by 2035.

The growth in global EV adoption also presents investment opportunities beyond automakers - from companies in the EV supply chain through to the operation of charging infrastructure.

Companies that supply key auto parts to EVs and are trading below Morningstar’s fair value estimates include BorgWarner (BWA), Sensata Technologies (ST), Aptiv (APTV) and NXP Semiconductors (NXPI).

Investing in metals and minerals players

Gleeson says as the uptake of EVs grows the metals and minerals required in their production will also see increased demand.

"Production of electric vehicles, as well as batteries and renewable energy systems, are critically dependent on a range of energy transition metals like copper, lithium, nickel, cobalt, graphite, manganese, silver and rare earth elements.

"It's our view that the producers of these metals are expected to benefit from the increased demand and structurally constrained supply."

^{Morningstar says lithium miners Albemarle and SQM are undervalued. Picture: Getty}

The International Energy Agency forecasts mineral demand for EVs and battery storage could grow by at least 30 times by 2040, with the biggest growth in lithium followed by graphite, cobalt and nickel.

Global mining giant BHP (BHP) expects EVs to represent more than 60% of vehicle sales globally by 2030, as does the IEA, before rising to 90% by 2040.

The increased demand for nickel and copper from EVs and the decarbonisation trend prompted BHP's just-completed $9.6 billion takeover of OZ Minerals.

In the lithium space, GM is investing $US650 million in Canadian miner Lithium Americas (LAC) to develop US-sourced lithium production.

Australian lithium miner Liontown Resources has rejected a $5.5 billion takeover offer from the world's biggest lithium producer Albemarle (ALB).

Albemarle has joint venture interests in two Australian lithium mines including an expanded partnership with Mineral Resources (MIN).

Morningstar views both Albemarle and Chilean lithium miner SQM (SQM), which has a joint venture with Australian conglomerate Wesfarmers (WES) to produce lithium hydroxide for the EV industry, as undervalued.

Morningstar's top lithium pick is Lithium Americas, which Goldstein says is materially undervalued.

"We think the market is overly bearish on the direction of long-term lithium prices due to the recent decline in spot prices, driven by slowing demand growth in China to begin the year," he says.

Goldstein says Morningstar expects high-double-digit annual growth in global lithium demand as EV adoption increases.

UBS’s picks in the Australian lithium sector are IGO (IGO) and Pilbara Minerals (PLS). It also has buy ratings on Mineral Resources and Allkem (AKE) and is neutral on Liontown.

ETFs are another option

The dozens of exchange-traded funds (ETFs) globally that invest in companies with exposure to the EV space are another option for investors.

"Over the longer-term period, it's difficult to pick individual winners, so investors should strongly consider ways to reduce company-specific risk and look to invest in a portfolio of manufacturers that are at the forefront of the move toward electric vehicles," Gleeson says.

Gleeson says funds like Betashares' Electric Vehicles and Future Mobility ETF (DRIV) and Energy Transition Metals ETF (XMET) are most appropriately considered a satellite exposure to the long-term trend towards seeing more electric cars on the roads.

"While it's a compelling opportunity, investors should still base their portfolio core around broad-based exposures to international and Australian equities, fixed income and other asset classes of this nature."