Electric-vehicle (EV) stocks have been on fire over the past year as investors bet that the industry will continue to grow. And as EV sales grow, there could be a number of industries and companies that benefit.
As we scoured the market for opportunities adjacent to EV production, Xcel Energy (NASDAQ:XEL), Lithium Americas (NYSE:LAC), and QuantumScape (NYSE:QS) jumped out to our Foolish contributors as big opportunities.
The utility play
Travis Hoium (Xcel Energy): If electric vehicles continue to grow and eventually take over the vehicle market, it’ll mean a significant rise in electricity consumption. A report prepared for the Department of Energy in 2019 estimated that by the end of the decade, an incremental 14 gigawatts or more of power generation will be needed to keep up with the growth of EVs by 2030. That would nearly double the amount of incremental electricity-generating capacity added each year and may lead to growth in electricity consumption, which has stagnated for more than a decade.
Stagnant demand is having an impact on utility revenue growth. Over the last decade, Xcel’s revenue has grown just over 1% compounded annually, so this isn’t exactly a growth stock. But the growth rate could change if electric vehicles take over transportation.
EVs alone could boost every utility’s growth, and Xcel Energy would be no different. And with shares trading at 22 times earnings and the dividend yielding 2.8%, this stock could be a long-term winner if Xcel’s growth rate improves because of electric vehicles.
Speculating on batteries
Howard Smith (Lithium Americas): Investors can bet on the emergence of electric vehicles in a number of ways. There’s much uncertainty, including developing technologies, competition, and theorizing on market adoption. One approach for investors is to create a basket of holdings with a range of risk-and-reward potential.
EV battery-technology investments lie at the high-risk end of the spectrum. But as part of a basket approach, assuming lithium-ion batteries remain a prominent choice for EV makers, lithium suppliers themselves should be part of the equation. Lithium Americas doesn’t even have an operating mine as of yet, but it’s in the construction and approval stages on two projects, including one on U.S. soil.
Lithium Americas’ two mining projects include one under construction in Argentina expected to start up in mid-2022 and the Thacker Pass project in Nevada. Thacker Pass is particularly notable due to its location, as leaders seek to secure domestic supplies of materials needed for electric vehicles.
The company believes its Thacker Pass project remains on track to begin operations in late 2022. In its fourth-quarter 2020 earnings release earlier this month, the company said, “All remaining state permits and water right transfers required to commence construction are expected later this year.”
The Thacker Pass project is currently 100% owned by Lithium Americas, but the company could bring in partners or investors. But after a recent capital raise, Lithium Americas had $518 million in cash as of Feb. 28, 2021. Most of that is available for the Thacker Pass project, as its Argentina mine project has already spent about 70% of the required capital.
An investment in Lithium Americas is very much speculation at this point, and an investment could be a total loss. Besides the company-specific risks, there will also be competitive domestic lithium mining operations in the U.S. But if electric vehicles do take over, and lithium-ion batteries remain the technology of choice, getting in early could also pay off nicely.
Disrupting the disruptor
Jason Hall (QuantumScape): I think it’s more of a “when” than an “if” electric vehicles come to dominate, though it’s likely to take years for that to happen because of the high costs and limited supply of batteries. This is a problem that QuantumScape is working to remedy, and with a technology that could lead it to be the biggest disruptor the auto business has seen since Tesla.
The catch? In order to do so, the company has to deliver on a technology that nobody else — so far — has been able to deliver at the cost and scale it will take to supply the auto industry.
Without getting bogged down in the details, solid-state batteries are lighter, more reliable, and much faster to recharge than the liquid or gel batteries we are more familiar with such as lithium-ion. The catch? QuantumScape is still years away from delivering a commercially viable product and has yet to prove it can deliver on its promises at scale. So this is far from a sure thing.
But investors including Tesla co-founder JB Straubel, who led battery cell design at the company, and Volkswagen, which invested $300 million in the company before it went public, have put their money behind the company’s efforts. It’s likely to be several more years before we know if it can do it, but if QuantumScape can crack the solid-state code, its technology would be a massive competitive advantage, making it potentially the most important — and most profitable — automotive supplier in the world.
The risk is big. If they can’t pull it off, investors will lose a lot of money. Take that risk into consideration just as much as the upside potential.
Riding the EV tailwind
If electric-vehicle sales continue to grow, we’ll likely see an increase in electricity consumption, lithium consumption, and a need for better batteries. That’s why these three stocks could all beat the market long term and why they’re our top picks today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.