Electric vehicle stocks are having a moment, and it's not just Tesla.
Alongside Tesla's monster rally throughout this year -- despite the impacts of COVID-19 -- smaller firms that build electric vehicles have also seen their valuations swell, particularly in recent weeks. Since the beginning of July, Chinese carmaker Nio (NIO) - Get Report has risen 65% to $13.02; Canadian micro-car maker ElectraMeccanica (SOLO) - Get Report is up 51% in the same period. Electric truck upstart Nikola (NKLA) - Get Report is up 50% since it went public through a special-purpose merger in early June.
The king of them all, Tesla (TSLA) - Get Report, has more than tripled its valuation year to date and is on the cusp on inclusion in the S&P 500 index. That's whipped up a feeding frenzy for Tesla shares: On Robinhood, the trading app, more than 40,000 accounts added Tesla stock during one four-hour window on Monday.
"One reason for the run-up is that Tesla has posted positive earnings for the last three quarters. If it posts a profit for 12 straight months it will meet an important criteria for being added to the S&P 500 Index," explained Anthony Denier, CEO of mobile brokerage Webull. "If it were added, this would force every fund tracking the benchmark to own it, creating a lot of buying pressure after the announcement. But that assumes these funds are not buying it during the rally."
As for the rest of the EV sector, they appear to be "riding on Tesla's coattails," Denier added, driven in large part by a storyline that electric cars are an important part of the solution to climate change. Private investors are also compelled: Electric truck maker Rivian, which is scheduled to kick off production in 2021, has hauled in billions in funding from the likes of Amazon (AMZN) - Get Report, Ford (F) - Get Report, T. Rowe Price and others.
It's a story that Tesla, and CEO Elon Musk, have cultivated throughout its existence, touting its eco-friendliness and casting itself as the oil & gas industry's ultimate foil. And the story may continue to benefit other, smaller EV stocks as long as there is evidence of sustained demand for electric vehicles.
But there are important distinctions among the companies -- and it looks like the market hasn't quite caught up, nor reached a clear consensus on how to value electric car makers.
In a note this week, Deutsche Bank analyst Emmanuel Rosner wrote that zero-emission commercial trucking is "poised to take off, driven by global regulations," and praised Nikola's fuel-cell solution. But he declined to recommend the stock at current prices, also noting that Nikola has not yet produced any vehicles.
"The biggest question on investors' minds, not traders, but those with a buy-and-hold mandate is what to make of valuation after the recent run up in prices," added financial adviser and RealMoney contributor Tim Collins, speaking of the EV market. "Investors are going to tip too far one week (overvaluing the companies), then overcorrect the next week (undervalue). This will continue until we see a multitude of products available for purchase or lease and several quarters of financial results."
To a casual onlooker, it might seem implausible that a company like Nikola or Rivian, neither of which have produced or sold a single vehicle, could reasonably fetch a multibillion-dollar valuation. For some names in the EV market, what we're seeing "is market acceptance that the combustion engine is no longer the future," Collins added. "Electric vehicles are going to become mainstream in not only the automotive sector, but also trucking, construction, delivery, and shipping."
If you're picking up some of the emerging names in the EV market, don't necessarily expect a Tesla-esque ascent.
Despite producing and selling far fewer vehicles, Tesla is currently worth more than Ford, GM (GM) - Get Report, BMW, Daimler and Volkswagen combined -- a data point that still raises a lot of eyebrows.
Secondly, the market is nascent. As the cost of manufacturing batteries falls, EV sales are expected to reach 21 million annually by 2030, according to Deloitte -- and that's just personal vehicles. A combination of sizable corporate investments, government incentives, and an increasingly appealing business case are expected to drive electric commercial vehicles into the mainstream in the coming years. Some of the biggest long-term winners are ones you may not have even heard of it.
"The long-term opportunities aren't likely in the popular names like Tesla, Nio, or Nikola, but in the niche or smaller players in the electric vehicle market," Collins added.