It's always smart to build diversification into a long-term portfolio. Markets and sectors go in and out of favor, and it helps to have some of your investments working at all times. That's even more important when building a portfolio within a specific sector.
Many see electric vehicles as the future of transportation, and it makes sense to have a hand in it as the sector blossoms. That, of course, is what pushed these stocks to unsustainable valuations in the excitement brought by the potential profits. Now stock prices have significantly retreated from previous highs, offering a better opportunity to begin to build a diverse mix of EV holdings. Here are two that would be a good place to start.
Image source: Tesla.
Tesla: The valuation discussion
Tesla (TSLA -3.55%) is the undisputed EV leader and trailblazer for the entire sector. But it took years for the business to mature. The stock rose ahead of the company's execution, however, keeping many people from owning it from a valuation perspective.
There was always the chance of failure, and even CEO Elon Musk said that his company was within about a month of bankruptcy when it was ramping up its Model 3 mass production in 2017. But Tesla plowed ahead, and sales have soared over the past several years.
Revenue will continue to grow as production is projected to increase by 50% annually for several more years.
With the company itself projecting production can increase by around 50% annually for several more years, that revenue is also going to continue to soar. Tesla's new manufacturing plants ramping up in Austin, Texas and near Berlin should help the company achieve that growth rate.
If the company achieves 50% growth in revenue this year, at recent prices the stock would be trading at a price-to-sales ratio of below 10. That's not cheap, but a long-term investor isn't holding for just one year. Looking further out, a 50% growth rate would quickly bring that valuation metric to a more reasonable level. And while the price-to-earnings (P/E) ratio is still extremely high based on 2021 net income of $5.5 billion, that too should drop as the business grows.
That highlights one of the main risks for Tesla as an investment, too, however. Based on 2021 net earnings, Tesla's P/E stands at more than 130. So the share price has already built in some of the company's ongoing growth. That's another reason investors need to frame any investment here for the long-term.
Nio: Expanding its reach
Tesla's new plant in Europe shows the company sees that as a target market. But its first facility outside the U.S. was built in Shanghai. There was good reason for that, too. China is the largest automotive market in the world, and the government has been supportive of the EV industry.
Nio (NIO 2.30%) is one of the leading, growing EV companies in China. It recently surpassed its 200,000th vehicle delivery, and has entered the European market. Nio isn't yet profitable, which gives it a higher risk profile than Tesla, especially given potential political risks unique to Chinese investments. But its established presence in China along with a move into Europe gives it a foothold in what should be the largest EV markets going forward.
Data source: International Energy Agency. Chart by author.
In its 2021 global EV outlook, the International Energy Agency predicted that China and Europe will still be the dominant global EV markets in 2030, making up 65% of EV sales.
Nio is expanding its product line along with its geographic reach. It recently began deliveries of its first sedan model. Beyond the luxury ET7, the ET5 mid-size sedan will launch later this year. A mass-market sub-brand has also been discussed by Nio's CEO, and recent reports say that plan is getting closer to reality.
While both Tesla and Nio are high-risk investments, that's part of investing early in a fast-growing sector. That's also why it's smart to own a more diverse mix of stocks in that sector. One can help mitigate that risk by making incremental investments as the companies successfully execute growth. Tesla and Nio are two stocks that make a good starting point for adding EV investments to a portfolio built for the long haul.
