A few years ago, the electric vehicle (EV) sector was all rapid growth and optimistic projections. Companies like Tesla reached trillion-dollar valuations, and traditional carmakers were pulling out all the stops to bring EVs to market. Everything seemed to point towards a quick transition to all-electric.
But going into 2024, dynamics have shifted. Prices have been slashed, the UK government pushed targets, and unsold inventory is common. Trends point to a market that’s cooling off.
But with the move from traditional cars to EVs almost inevitable, why do consumers look so sceptical?
Enthusiasm of early EV users hasn’t quite translated to the broader consumer yet. There’s also more work to do to convince consumers that EVs are reliable and the charging infrastructure is good enough to support everyone.
For those not quite ready to switch completely, the hybrid market is a happy middle ground. And this transitional phase might offer opportunities for companies adapting quickly.
We’ve taken a closer look at two companies – one traditional car company making inroads into the hybrid and EV markets and one EV maker offering a little extra on the side.
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Stellantis
Stellantis formed in 2021 from a merger that saw Peugeot and Fiat Chrysler join operations. It also includes the likes of Citroen and Maserati, and is one of the world’s biggest traditional carmakers (or automotive original equipment manufacturers – OEMs).
It’s on track for 100% of sales in Europe and 50% of sales in the US to be EVs by the end of the decade. We think it’s one of the best-positioned OEMs to navigate this transition.
Unlike thoroughbred EV brands like Tesla, OEMs are having to produce both traditional combustion engines and electric technologies. To protect profit margins, they’re investing heavily in streamlining costs.
Stellantis is getting ahead here, developing scalable and modular components that can be used across vehicle types. This means it has better margins than many of its peers.
Adjusted operating margin
Cost leadership and the quality benefits of simplification should be a tailwind while peers invest to catch up.
With higher efficiencies at its factories than peers and smart outsourcing for less critical components, the company is better-prepared to maintain its profitability. Even if demand decreases temporarily.
Despite its huge scale, there are still opportunities.
Western manufacturers have struggled to make inroads in China. But, Stellantis will be hoping the 20% stake it got from the Chinese EV carmaker Leapmotor last year will change its fortunes.
Helping fund the €1.6bn stake in the company is an impressive free cash flow and a strong balance sheet. The prospective 6.5% yield should be well covered. But remember, yields are variable and no dividend is ever guaranteed. Overseas dividends can be subject to withholding tax which might not be reclaimable.
Even with a global presence, North America still makes up almost half of Stellantis’ profits. Subdued consumer confidence and a muted economic outlook mean growth in this market isn’t expected to shoot the lights out in the near term though.
Relative to other high-volume OEMs and its historical average, at 4.3 times the expected earnings, we think this could be an attractive entry point for investors.
There’s still a big opportunity for OEMs who can successfully manage the transition to an electric future. But Stellantis remains exposed to consumer demand, especially in America, and investors should be prepared to ride out any short-term volatility.
Tesla
Tesla, and maybe more specifically Elon Musk, are always going to grab headlines.
Some will argue the outspoken CEO is a risk to the business and that new initiatives from humanoid robots to autonomous driving are a pipe dream.
Others will point to the huge shareholder wealth that’s been created under Elon and that Tesla is far more than just a car company. The reality is probably somewhere in the middle.
What’s not up for debate are the challenging conditions that Tesla’s facing in the EV market. The latest delivery numbers are disappointing, reflecting the EV demand slowdown and the impact higher interest rates are having on affordability.
Total deliveries
Given it’s well ahead in producing at scale and generating free cash flow in the process, Tesla should fare better than its peers.
But even Tesla is struggling to keep cash flow positive right now and smaller competitors who aren’t in such an advanced position are likely to enter survival mode.
Fisker is an example that’s already had to take drastic measures – and probably won’t be the last.
Margins are the other point of note.
Price cuts have been a common theme to try stoke demand, but that brings margins down. The announced 14,000 job cuts are an attempt to right-size operations, which should help, but that’s not a long-term solution.
Areas like full self-driving (FSD), which brings in extra income per vehicle, are more important to grow margins. The FSD rollout has gathered pace recently, and improvements should come faster as Tesla isn’t limited by computing power anymore.
One key shift has been a move from traditional programming to using a neural network approach. Essentially, it means the vehicle can process data more like a human.
The valuation is more attractive than it’s been for some time. For those willing to accept some risk, there’s still a long-term opportunity for Tesla to continue leading the EV market and better monetise areas like insurance, robotics, and automation.
That said, Tesla faces a challenging time ahead as it adjusts to slower EV take-up. And while recent advancements in areas like full self-driving have been exciting, it will likely take longer than some had hoped to see the full benefits. Patience will be key.
One of the authors and a connected party holds shares in Tesla.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.
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