COVID-19 wasn’t always the talk of the Street. The rapid pace of climate change has made finding renewable energy sources and limiting pollution more important than ever before, and as such, the spotlight has landed on electric car companies.
Already making some serious headway, demand is expected to persist in the long-term as more and more countries roll out programs designed to encourage the purchase of these vehicles. According to a report published by Cairn Energy Research Advisors, a research firm focused on the battery and electric vehicle (EV) industries, in 2021, global sales of EVs are expected to exceed 3 million for the first time ever.
The implication? Major gains could be in store for stocks belonging to this burgeoning space. That being said, analysts remind investors that not all EV stocks are created equal, with some significantly more compelling than others.
Taking this into consideration, we used TipRanks’ database to take a closer look at two EV stocks that have received quite a bit of attention recently. As it turns out, one has scored rave reviews from some analysts, while the other gets a thumbs down.
Nikola Corporation (NKLA)
Specializing in the production of electric and hydrogen-powered semi-trucks, Nikola is also working on an alternative-fuel pickup truck called the Badger, a network of sustainable hydrogen fueling stations and electric recreational vehicles. Despite the significant drop posted by shares over the last month, some members of the Street believe that several potential catalysts could propel it forward.
Calling NKLA a “story-stock”, J.P. Morgan analyst Paul Coster points out it is “trading on a massive multiple of distant-future earnings.” In turn, this has caused investors to focus on the potential pitfalls, but he argues it’s also “worth dwelling on what could go right here, which is that the company executes to plan, captures a significant share of the global truck market, and emerges as a key infrastructure provider in a future Hydrogen-based economy.” He also stated, “If the company does execute to plan, then investors will be holding a stock that systematically de-risks with each passing implementation milestone, which could lead to a lower discount rate.”
Offering an explanation for the recent volatility, Coster notes that trading volumes are currently very high even though float is limited. The analyst has interpreted this to mean that the stock movement has been driven by short-term traders, with institutional investor focus landing primarily on warrants.
“We sense that the stock will remain volatile until the SPAC shares are registered and the warrant calls are exercised (by the company), which could lead to some additional selling (easily absorbed by current trading volumes), and then some degree of stabilization as the stock finds its way to higher conviction investors,” Coster explained.
As for recent developments that bode well for NKLA, the European Commission unveiled its plans to promote clean hydrogen, as part of the Green Deal economic recovery plan. Hyundai has already started shipping (10) hydrogen XCIENT fuel cell trucks to Switzerland, with the goal of selling 1,600 FCEL vehicles by 2025. What does this mean? According to Coster, it sets the bar high for NKLA. In addition, initial demand for the Badger BEV pickup truck has been robust.
Adding to the good news, the company is expected to announce an OEM partner for the Badger truck, an H2 station deployment plan for the UK and possibly even accelerated implementation plans for the FCEL truck in the U.S. Coster added, “California’s CARB ACT ruling could lead to accelerated adoption of H2 infrastructure on the West Coast, beyond Nikola’s original plan. We think the stock will react favorably to any developments that shorten and/or de-risk the BEV and FCEL truck implementation plans.”
In line with his optimistic take, Coster stepped over to the bulls’ side. In addition to upgrading the rating from Neutral to Overweight, he put a $45 price target on the stock. A twelve-month gain of 50% could be in store, should the analyst’s thesis play out in the year ahead. (To watch Coster’s track record, click here)
Turning now to the rest of the Street, opinions are split evenly. 2 Buys and 2 Holds add up to a Moderate Buy consensus rating. At $56, the average price target is more aggressive than Coster’s and brings the upside potential to 87%. (See Nikola stock analysis on TipRanks)
As for the other EV stock on our list, Nio shares have been charging forward, with it already having gained 199% since the start of 2020. That being said, some analysts believe that there isn’t any more fuel left in the tank.
Not long ago, Goldman Sachs analyst Fei Fang was bullish on the stock. At the beginning of June, the analyst upgraded Nio to Buy before it reported its vehicle deliveries. The company was able to deliver 3,436 vehicles in May, which reflected a year-over-year gain of 215.5% and blew estimates out of the water.
While this achievement was a new record for the company, Fang started seeing problems with NIO’s long-term growth narrative. On top of this, NIO reported that despite the impacts of the COVID-19 pandemic, June sales climbed 179% higher from the prior-year period. Not to mention the EV maker saw quarterly shipments exceed 10,000 for the first time in its history.
This was met by applause from investors, but Fang became worried that the valuation was skyrocketing too high. And thus, although the underlying fundamentals are strong, the analyst stepped onto the sidelines.
Now, Fang believes the stock has surged enough for now. “Post the 89% share price rally in the past month, we downgrade NIO to Sell on valuation, as we believe the current share price reflects over-optimism given no substantial changes to volume/profit expectations,” the analyst explained.
It should be noted that since the pandemic’s onset, Nio has secured funding and gotten cash infusions that “have largely removed any liquidity risk for the company between now and our expected break-even in 2022E.” Additionally, several factors would make Fang more optimistic about the company’s growth prospects.
“Successful deployment of these resources could lead to faster product launches, which could expand demand and accelerate break-even,” Fang stated. He also noted, “The Nio brand’s positioning provides the premium pricing power that we expect the company to leverage across model cycles and powertrain technologies.”
Due to all of the above, Fang joined the Nio bears. Along with the call, a $7 price target is left on the stock. This figure implies shares could decline 41% in the next year. (To watch Fang’s track record, click here)
Looking at the consensus breakdown, 2 Buys, 2 Holds and 2 Sells have been assigned in the last three months. So, NIO gets a Hold consensus rating. Given the $7.26 average price target, the downside potential comes in at 39%. (See Nio stock analysis on TipRanks)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.