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Alternative ways to invest in electric vehicles

We take a closer look at four companies that could benefit from the electric vehicle revolution.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Those in the business of making electric cars might seem like the obvious beneficiaries of the electric vehicle (EV) revolution. The next decade will see them invest $300 billion as the market for EVs is expected to expand rapidly.

But we think one of the best ways to consider jumping on the EV revolution is to look under the hood at the suppliers, rather than the manufacturers. These companies can be overlooked, and that can offer opportunity.

The market’s already quite excited about a lot of the headline-making EV stocks, adding an extra layer of risk. Looking at the bigger industry as a whole could potentially offer a greater range of investment options.

This article isn't personal advice. If you're not sure if an investment is right for you, please speak to a financial adviser. All investments rise and fall in value, so you could get back less than you invest. Past performance is not a guide to the future.

Investing in individual companies isn't right for everyone. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Charging Stations

Much like petrol stations have benefitted from traditional cars for decades, charging stations can be a good first place to start looking for EV opportunities.

ChargePoint Holdings is one such company, which went public less than a year ago in the US via a Special Purpose Acquisition Company (SPAC). A SPAC is a publicly traded firm that pools investor money in order to take a start-up public through an acquisition. It allows retail investors to invest in early-stage companies and foregoes the traditional IPO process.

IPOs – what are they and what investors need to look out for

ChargePoint sells charging equipment, as well as software and service subscriptions and offers both commercial and residential charging products. It’s a market-leader in the US and is working on growing its presence across Europe.

The group benefits from recurring software subscriptions, which make up 27.7% of overall revenue. Those same subscriptions boast profit margins of 50%. That’s because building software costs a lot up front, but once up and running, adding an extra subscription is basically costless. There’s future opportunity for profit growth in this division.

However, networked charging stations are still the group’s bread and butter. Profit margins in this segment are a lot less exciting at 5.2%. There’s a chance that figure could sink lower long term as well.

Charging stations could eventually become commoditised, meaning drivers won’t prefer one brand over another. That will undercut pricing power, potentially forcing them to offer electricity on razor-thin margins. In that scenario, software would need to be relied on as the group’s profit engine. We’re not saying charging margins are going to drop to 0% overnight, but it’s something to bear in mind.

As is the case with most young tech stocks, ChargePoint isn’t profitable once you get to the operating profit level, which includes extra – but necessary - costs. The cost to develop charging technology is hefty and the group has had to spend a considerable amount on marketing to win new business. All else being equal, those costs should start to subside as the group builds scale, but there are no guarantees.

The market has high hopes for ChargePoint, with shares changing hands for 26 times expected sales. This is a lot less demanding than rivals like Blink (115.4 times expected sales), but there’s still plenty of pressure for ChargePoint to perform.

SEE THE LATEST CHARGEPOINT SHARE PRICE, CHARTS AND HOW TO TRADE

An electric future

Zooming out further, the electricity that powers the charging stations has a stake in the game, just as oil benefitted from petrol cars. That means utilities like National Grid could stand to benefit from the expected flood of EVs on the roads.

It’s not often that a utility stock crosses over into the growth territory, but that’s exactly what could be happening at National Grid (NG). The group recently announced plans to acquire PPL’s Western Power Distribution electricity distribution assets. This has helped expand the group’s control of the UK’s electric power grid and increased the group’s weighting to electricity for the overall portfolio from 60% to 70%.

That puts NG in a fantastic position to capitalise on increased demand due to needing to charge EVs. But it remains to be seen whether regulators will put a cap on how much the firm stands to gain. Utilities like National Grid are subject to a lot of red tape, and it’s been under the microscope lately as the UK marches into the all-electric future.

However, it’s worth mentioning the regulator, Ofgem, previously recommended that NG separate itself completely from managing the grid to prevent a conflict of interest. With this purchase, the group could attract more attention from the regulator, furthering Ofgem’s case. If NG is barred from controlling the grid, it would take some of the shine off the group’s growth prospects. However, NG will still benefit from owning the assets that EV drivers will be clamouring for.

The other concern for NG is debt. To fund the purchase, National Grid is selling some of its American assets. But as the two transactions won’t happen simultaneously, the group had to take out high-interest bridge loans. As long as both deals go to plan, this shouldn’t be an issue. But if the American asset sales fall through, NG will be saddled with a great deal of expensive debt.

While there are certainly risks to NG’s EV-related growth, we’re optimistic. And with the dividend expected to yield 5.5%, investors could be rewarded for their patience. Keep in mind though, yields are variable and are not a reliable indicator of future income. No dividend is guaranteed.

SEE THE LATEST NATIONAL GRID SHARE PRICE, CHARTS AND HOW TO TRADE

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Chips Drive Cars

Semiconductors are a key component in electric vehicles, and there are a wide range of chipmakers supplying them. However, NXP Semiconductor has a lot of exposure to the space, generating almost half of its revenue from carmakers.

Let’s start with the positives. While NXP is dependent on carmakers, it does supply other industries which offers some cushion if the EV market is upended. That includes other fast-growing sectors like the Internet of Things and mobile.

Plus, the group’s business generates a lot of cash – the group reported free cash flow (the net amount of cash generated from operations minus the amount spent on capital expenditure) of $2.1bn last year.

Not only does that give management room to make strategic moves as needed, but it also lets the group return some of those funds to shareholders, through dividends and buybacks. With a modest yield of 1%, NXP’s income is enough to cover its dividend payments 12 times over. That means it’s relatively reliable. Remember though, yields are variable and no dividend is ever guaranteed.

Recently NXP has been at the centre of a global chip shortage as demand for the components surged over the past year. On top of the ballooning EV market, the growing need to work and communicate remotely strained the supply chain. That’s a positive for chipmakers like NXP, because it increases their pricing power.

We expect the chip shortage to continue, though not at crisis levels. This could create a glut at some point in the future. Overcompensating for the lack of chips could eventually flood the market, eroding NXP’s margins. We don’t see this as an immediate concern, though. The ever-expanding world of connected devices means chip demand will likely outstrip supply in the medium term.

SEE THE LATEST NXP SHARE PRICE, CHARTS AND HOW TO TRADE

The platinum touch

Miners are another worthwhile place to look for EV beneficiaries, as the raw materials they sell are an essential part of the manufacturing process. While there are some smaller companies out there whose operations are geared toward battery production, we value the diversity offered by some of the industry’s larger players.

Platinum Group Metals (PGMs) are a key component in Hydrogen Powered Fuel Cell Electric Vehicles, and Anglo American is one of the world’s leading suppliers. Iron Ore is the group’s largest growth engine, but PGMs are the second largest division, contributing 26.1% of underlying cash profits.

So far, we’ve seen EVs push the demand for PGMs skyward. Anglo saw the benefit of this with underlying profits in the division up 28%, despite making less due to a plant outage.

Anglo aims to pay out 40% of its profits to investors through dividends. As PGMs are a substantial contributor to the bottom line, sustained demand from EVs should help support dividend growth for years to come. No dividend is ever guaranteed, though.

Anglo looks well positioned to benefit from the growing EV market, particularly if commodity prices stay well-supported. Plus, the group has plenty of other irons in the fire, so to speak, to insulate it from an EV collapse.

SEE THE LATEST ANGLO AMERICAN SHARE PRICE, CHARTS AND HOW TO TRADE

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Our View

The EV market is more than just cars. There are a range of options out there that offer you a chance to invest in lots of different ways. Diversity is the cornerstone of successful investing and looking outside of the obvious auto names could be a good way to do this.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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