- The electric vehicle (EV) sector has been a stand out performer in 2021.
- We expect this trend to continue in 2022.
- Tesla, Ford and NIO are our top stocks for 2022.
The electric vehicle (EV) space has certainly been one of the best performing sectors of the year. Will this trend continue into 2022? Public perception and adoption of electric vehicles appears to have reached a precipice with a number of catalysts.
First, range anxiety is decreasing among consumers as battery technology improves. Ranges of up to 500 kilometers (~300 miles) are now more commonplace and in step with combustion engine ranges. Added to this is the continued development of high speed charging stations, meaning no longer is electric refueling measured in hours but instead in minutes.
Governments have also increasingly come on board, providing generous incentives to consumers switching from combustion engines to electric motors. Commitment from governments to a more accessible and wider network of charging stations is also ramping up.
However, work still needs to be done. Europe is considerably behind China and the US in EV adoption. Public charging infrastructure is still nowhere near the availability of fuel stations. This is a unique challenge for all EV participants. In the past governments could rely on the desire for profitability to ensure a continuous fuel economy infrastructure. With the advent of electric vehicles, the fuelling station has passed from Big Oil to a quasi mix of government and utility companies.
In many cases, especially in Europe, there is little privatisation of utility infrastructure, meaning governments are on the hook for providing charging stations and a wide ranging network. Many governments will have to engage in public/private partnerships to reach critical mass in charging networks as this is the final hurdle to widespread adoption. Most major global auto manufacturers are committed to going fully electric within the next five to ten years.
Drilling down into specific company performance, the sector is clearly in kow to the behemoth, Tesla (TSLA). Tesla has virtually invented the whole sector and continues to lead the way. Elon Musk has become the world's richest man on the back of Tesla’s stock performance, and 2021 was another stellar year.
At the time of writing, Tesla shares are up 37% year to date. Other EV names that have captured investor attention this year include Lucid Group (LCID), which went public via a SPAC deal. Lucid is led by former Tesla engineer Peter Rawlinson and has designed stunning vehicles. Rivian (RIVN) was the fifth largest IPO in US history and is backed by Ford (F) and Amazon (AMZN). Smaller names caught the retail investor zeitgeist but have since faded from the limelight. Names such as GOEV and others may return to attention in 2022.
Chinese auto manufacturers have steadily produced strong and growing vehicle delivery numbers as the enormous auto market in China adapts and adopts EVs. The Chinese authorities are also strongly behind the transition. The likes of NIO, XPeng (XPEV) and LiAuto (LI) have, at various stages, seen large appreciations, but volatility in Chinese stocks has remained elevated due to numerous negative headlines, ala DIDI, Evergrande, etc.
For 2022 then we have selected three EV stocks that we expect to outperform, not only the EV sector, but the broader stock market as a whole. Tesla (TSLA) will remain king, but we do not want to chase and wait for a pullback that is currently in progress. NIO should continue to capture the strength of the Chinese market. Ford (F), which is well on the road with its Mach-E Mustang, has broken out of a multi-year downtrend. Ford also has a free bet with Rivian (RIVN). Apologies to holders of Rivian (RIVN), GOEV, Li Auto (LI), XPeng (XPEV) and others. The choice was not easy.
Tesla stock news and forecast
There is not much new that can be added about Tesla. The stock has had a magnificent end to 2021. As mentioned above Tesla is up 37% so far in 2021, but it is actually up 60% since June. Delivery growth has been steady, earnings growth remains strong and demand is such that Tesla is constantly struggling to keep up. Tesla is the brand leader, and this is unlikely to change in 2022.
Now a word of caution to fundamental investors: Tesla trades on exceptionally high multiples. This is a super high growth stock, so it will not look good in terms of traditional valuation metrics, price/earnings ratios, etc. However, high growth names that succeed do eventually revert to more normalized metrics. Amazon (AMZN) in its infancy traded on a price /earnings ratio of over 1,000. Tesla is a high growth name. Scanning the table below shows those growth rates.
Source: Seeking Alpha
In all key sectors Tesla is well ahead of its peers, and what is more, analysts expect those growth rates to continue.
Momentum has always been a factor to consider when investing, but it has become something of a dirty word this year with the rise of meme stocks. However, numerous research studies have demonstrated the power of momentum. Simply put, past performance is predictive of future performance. Winners tend to remain winners, while losers remain mired. Tesla certainly has momentum on its side. We do not need to give you a fancy chart to tell you this, but the daily price chart in our forecast section is evidence enough.
Tesla stock forecast
We fully expect the current retracement, catalyzed by Elon’s sales, to continue. Our first point of consideration will be at $910. The weekly chart shows further support at $880 to $850. We expect momentum to slow until earnings on January 31. That should be the catalyst to reenter.
Ford stock news and forecast
- Ford (F) has a 12% stake in EV maker and hot stock Rivian (RIVN)
- Ford has its own blockbuster EV, the Mustang Mach-E
- Ford has broken out of a long term downtrend to make 20 year highs
Ford is an unusual pick for an article on EV stocks, but all auto manufacturers are in transition mode to EV status anyway.Ford has a few unique drivers that we feel will help it outperform mainline automakers.
Ford is a shareholder in Rivian
Rivian was the hottest and biggest IPO of 2021 and one of the largest in US history. Rivian is worth $100 billion. Ford is actually worth less at $80 billion but Ford owns 12% of Rivian.
Essentially then, buying stock in Ford is getting you an added kicker from Rivian. While we see Rivian as currently being all froth and no fundamentals, this should change as production ramps up. Any production fanfare is likely to see increased momentum in RIVN and then F by default. Rivian recently won MotorTrend Truck of the Year for its R1T.
Ford already has a blockbuster EV
The Mustang Mach-E is flying out of showrooms, and Ford is struggling to keep up with production. Ford has announced just this week that it will triple production of the Mach-E electric vehicle due to incredible demand. Ford plans on repurposing its entire Mexico plant to focus on the Mach-E. "On the strength of Mustang Mach-E, Ford delivered record electrified vehicle sales, growing more than three times faster than the overall segment," Andrew Frick, vice president of sales for US and Canada, said in a statement.
"The goal is to become the clear No. 2 electric vehicle maker in North America within the next couple of years," Said Deep, head of North America product communications for Ford, told CNN. Ford has also said that over 70% of Mach-E buyers are new Ford customers.
Ford stock forecast
The latest earnings from Ford were strong with a very high beat on earnings per share (EPS). Revenue also came in ahead of forecasts.
The table below shows analyst forecasts for 2022 and 2023. Revenue is expected to grow nearly 13% for each of the next two years, which is a significant improvement from previous years. Gross margin is also growing to 14%. Revenue growth with improving margins should flow directly down to earnings.
The only caveat to add are input costs. Costs and inflation are rising for many corporations. There is no argument there. Ford is working hard to improve its supply chain and semiconductor supplies. However, labor costs will also likely rise. Ford will have to absorb some costs, reduce others, so will Ford be able to pass on cost increases to consumers?
This is the key if looking for market share. However, we should point out that President Biden's green energy bill favours only unionized EV makers. This is one point for Ford over Tesla. This may push affordability more in favour of Ford and the Mach-e versus Tesla models. Tesla has brand awareness and loyalty, but the Mustang has always had its own mystique. Both brands are powerful.
Another reason for selecting Ford as one of our EV stocks to watch is the multi-year breakout on the chart. This article has a more long-term focus than our daily articles. A multi-year breakout on the long-term chart is powerful.
Ford shares made 20-year highs in December.
Now the “everything is expensive” narrative certainly applies here, and investors are correct to air concerns about stock performance going forward. However, as we outlined in our yearly S&P 500 forecast here, the economic picture is just too strong for a bear market. Bear markets do not happen with a background of strong economic growth and corporate earnings. Pent-up demand has yet to be fully released. Monetary policy will remain accommodative, despite any taper or potential rate hikes, and corporate earnings growth will be strong.
Ford is trading to the top of its range, but this macroeconomic backdrop gives us comfort. Even if we are late to the trend, there is still more to come in our view. The current flag formation has had a false breakout, meaning it may set up for a break lower. Support at $18 and $16 are very strong thoughboth in price and volume terms.
Nio (NIO) stock news and forecast
We add NIO to our selection for four reasons:
- NIO has new product launches in 2022, and China is the world's largest EV market.
- It is better known internationally over XPeng and Li Auto, and its plans for expansion are more advanced.
- Delivery growth is strong.
- Chinese regulatory concerns have held the stock back, but those have largely focused on tech companies.
I must divulge that I am long NIO, so I have a natural bias in this article. The rest of the analyst community does share this view by and large. I bought NIO after the Chinese tech sell-off that saw NIO lose 30% of its value in a pretty short space of time. So far the stock has yet to bounce in a meaningful way, but there are numerous tailwinds slated for 2022.
As mentioned, China remains the world's largest EV market and NIO has new product launches to tap into. First, to satisfy the growing Chinese middle and upper class population, NIO is launching a premium ET7 sedan. The ET7 will compete in the luxury end, while the ET5 will be a more mid-market offering. The ET5 is rumoured to be unveiled at NIO day in late December 2021.
Also a growing SUV lineup is due to be added to on the same platform, meaning production can easily be scaled. NIO currently offers two SUVs, a large 7-seater ES8 and the more modest ES6. NIO also has a luxury crossover SUV – the EC6.
NIO International Expansion
NIO announced in early summer that it was to expand to Norway and Germany. Norway is often selected due to its high EV adoption, making it the perfect environment for new test launches and market fact finding. NIO announced on June 11 that it had received European Whole Vehicle Type Approval for the ES8. While the company does not have plans to expand to the US for now, international expansion beyond China is very much set for 2022.
Strong growth rates
While NIO has produced some volatile results, the underlying trend of strong revenue growth and rising margins should see earnings steadily grow. Revenue growth has been over 100% and is forecast at over 70% for 2022.
Delivery numbers have also been impressive with yearly growth rates over 120%. November 2021 deliveries showed a rise of 106% from a year earlier.
While cost issues are a factor affecting many companies and economies in 2022, Asian inflation rates have been more contained. Chinese CPI was 2.3% in November, comparing favourably with Western economies. China remains a major producer of electronics and semiconductor chips.
All this and more was picked up on by Goldman Sachs in October when they issued a buy rating on NIO with a $56 price target.
NIO stock forecast
Now I have outlined the fundamental case above, but the technical outlook is not quite so bullish. NIO has fallen sharply from its 2021 highs. The earlier part of this can be put down to the meme stock fizz of early 2021. However, the slide from July is more due to concerns over regulation.
China has been taking a tough stance on its tech space. Worries over national security and data control are at the heart of the issue. NIO has been caught up in this but has not had any direct issues that we are aware of. This may be presenting a unique buy opportunity with contagion being misplaced. China/US tensions are likely to remain elevated politically, which may hurt sentiment early in the year. However we expect earnings and delivery growth to continue to surprise analysts, meaning investors will eventually have to overlook geopolitical and regulatory contagion concerns.
This one has conflicting signals in my estimation in terms of fundamentals and technicals. Fundamentally, the stock has a strong base as discussed above. Technically though, NIO is sitting on the edge of a precipice. $26 to $28 is a consolidation zone from late 2020. Breaking this will likely lead to $22 and so filling the gap from October 2020. That would certainly be a tempting entry point, but that is not much good when the stock is trading at $30.
The Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) are weak and NIO is trading below all major moving averages. The options here are to wait for a bottoming formation or wait for momentum and then jump on. Everyone has different time horizons, but seeing as how this is a yearly forecast I will offer my own long-term strategy.
NIO has not closed below $30 despite having a few intraday spikes below. If NIO were to close below $30, I will likely exit my position and remain on watch to reenter. My first zone of support is at $25. This will be my first level to return in the event NIO breaks $30. I will not panic if the stock retreats more to fill the gap at $22, but a close below $20 will stop me out again. Obviously, this strategy runs on the assumption that underlying earnings remain strong. Any change and the strategy will have to be revisited.
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