Contents Overview
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Electric Vehicle Technology
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Lithium-Ion Batteries
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Tesla
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The Future of the Electric Vehicle
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Overview When you think of electric vehicles, it’s hard to look past Tesla, the popular luxury electric car manufacturer. The company and its CEO Elon Musk have transformed the public perception of electric vehicles. Its cars are design marvels, boasting unparalleled engineering with the ability to drive long-range, a feat no other electric vehicle maker has been able to achieve. Tesla is the most well-known name in this revolutionary field today, but that does not mean shares of TSLA are the most profitable way to invest in this trend A few other companies are quietly making progress, and they seem poised to hand investors strong returns in the months ahead. Who will come out on top in the electric vehicle industry? You would probably never guess our pick. Inside this special report, Zacks Investment Research has provided an in-depth look at the present and future state of the electric vehicle industry, as well as examining the technology and components that make up an electric vehicle, along with the one stock our analysts predict will gain the most as electric vehicles become mainstream. Read on to learn more about the electric vehicle industry, and how you can cash in.
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Electric Vehicle Technology The electric car is not an invention of modern times. In fact, it has been a significant part of automobile history since the 1800s. Innovators in the United States, the Netherlands, and Hungary created some of the first small-scale electric cars around 1830, but the first successful electric car, at least in the U.S., debuted in 1890. William Morrison, a Des Moines, Iowa-based chemist, created a six-passenger vehicle capable of reaching 14 mph; it was basically an electrified wagon, but it spurred interest in electric car technology that has lasted ever since.
How they work “Electric vehicle” does not refer to just one type of automobile, but to an ever widening range of vehicles, including hybrid-electric vehicles, plug-in hybrid electric vehicles, battery electric vehicles, and vehicles that use fuel cell technology.
Hybrid-electric Hybrid-electric vehicles (HEVs) combine a combustion engine with an electric motor and battery in order to reduce fuel consumption and tailpipe emissions. By utilizing both a conventional engine and electric motor, hybrids can achieve better fuel efficiency over their non-hybrid counterparts. Its features include an idle-off tool that switches off your car’s conventional engine when stopped, which saves fuel; regenerative braking, which turns the kinetic energy created while breaking into electricity, and stores it in the battery; and a power-assist mode that helps reduce demands on the gasoline engine, allowing it to be more efficiently operated. A classic example
Bloomberg sees annual electric vehicle sales topping $40 million by 2040.
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of a hybrid-electric vehicle is the Toyota Prius.
Plug-in hybrid electric Pug-in hybrid electric vehicles (PHEVs) are hybrids that can be plugged in and charged, and run short-term on battery power alone. For longer-range traveling, the gas engine then kicks in when the battery reaches the end of its charge. PHEVs run on electricity from the grid, and they don’t emit any tailpipe pollution when driving on electricity. Most PHEVs can work in at least two modes: all-electric (using energy created from the motor and battery) and hybrid (using both electricity and gasoline). The cars typically start in the all-electric mode, running on electricity until the battery pack is depleted; ranges can vary from 10-40+ miles. PHEVs utilize the idle-off feature and regenerative breaking. The Chevy Volt was the first plug-in hybrid electric vehicle on the market, debuting in 2011.
Battery electric Battery electric vehicles (BEVs) run entirely on battery power, using electricity stored in a battery pack to power an electric motor and turn the wheels. Batteries are then recharged with either grid electricity from a wall socket or a designated charging unit. Battery electric vehicles use no gasoline or diesel for power, and produce zero tailpipe emissions. At their full charge, BEVs have a driving range between 70-100 miles, and some models can reach 265 miles on a single charge. These cars are known for their near-instant torque, or turning-force, meaning that BEVs have very fast acceleration rates as well as a light and quick feel compared to conventional vehicles. Examples of BEVs include the Nissan Leaf and Tesla’s Model S.
Fuel cell Fuel cell vehicles utilize hydrogen gas to power an electric motor, combining hydrogen and oxygen to produce electricity. They are powered entirely by electricity, but unlike other electric vehicles,
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they have a range and refueling processes comparable to conventional cars. If the hydrogen comes from renewable resources, fuel cell vehicles produce virtually no emissions. In order to refuel a fuel cell vehicle, owners would travel to a hydrogen refueling station, and it takes less than 10 minutes to fill current models. Once filled, fuel cell vehicles have a comparable driving range to gasoline or diesel-powered vehicles, between 200-300 miles. Like other electric vehicles, these cars can employ an idle-off mode and regenerative breaking. There are not many fuel cell vehicles on the market, but current models include the Hyundai ix35 and the Toyota Mirai.
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Lithium-Ion Batteries The battery in electric vehicles is one of its most important components, and Lithium-ion (Li-ion) batteries are a popular choice by manufacturers. Li-ion batteries are a type of rechargeable battery in which lithium ions move from the anode to cathode during discharge, and from cathode to anode when charging. The materials used for the anode and cathode can dramatically affect a number of aspects of the battery’s performance, including capacity. Besides electric vehicles, Li-ion batteries are commonly found in consumer electronics like cellphones, laptops, and other devices, as well as in the defense and aerospace industries. Advantages of Li-ion batteries are numerous. They’re low-maintenance, have high energy density, and no scheduled cycling is required to prolong the life of the battery. The self-discharge is less than half compared to nickel-cadmium, making lithium-ion well suited for modern fuel gauge applications; lithium-ion cells cause little harm when disposed. But with these advantages come many limitations. Li-ion batteries require protection circuit to maintain voltage and current within safe limits. They are subject to aging, even when they’re not in use, have transportation restrictions where large quantities may be subject to regulatory control, and its elements are not fully mature because its metals and chemicals are changing on a continuing basis. Most notably, Li-ion batteries are very expensive to manufacture, and are roughly 40% higher in cost than nickel-cadmium.
Market Potential The market for Li-ion batteries has a lot of untapped potential, but the demand for them has only begun to rise. Tesla, the luxury electric car maker, is in the process of completing its massive, $5 billion Gigafactory in Sparks, Nevada, and as a result, has brought a glaring focus on the supply shortage of this emerging energy storage technology.
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The name “Gigafactory” is a term that comes from Tesla’s planned battery production amount per year of 35 gigawatt-hours (GWh). In quantifiable terms, “giga” is a measurement unit that stands for “billions”; one GWh is the same as generating one billion watts for one hour, or one million times more than that of one kilowatt-hour (kWh). Production at the Gigafactory was originally slated to begin in 2017, but because of the launch of Tesla’s low-cost Model 3, battery production has been jumpstarted, with actual battery cell production likely to begin in November. Investors are starting to take interest in Tesla’s commitment to Li-ion batteries. Japanese electronics giant Panasonic (PCFRY) recently agreed to invest up to a whopping $1.6 billion—and more if need be—in eight installments in the Gigafactory.
Not Just Tesla According to Frost & Sullivan, a market research company, the global market for Li-ion batteries is expected to double to $22.5 billion in 2016 from $11.7 billion in 2012. The share of the automobile sector in the lithium-ion battery market is expected to grow to 25% in 2016 from 14% in 2012, per the data from Frost & Sullivan. This represents a Compounded Annual Growth Rate (CAGR) of 37%. There are many companies out there besides Tesla who both utilize and manufacture Li-ion batteries. Auto manufacturers including General Motors Co. (GM), Navistar International Corp. (NAV), Daimler AG (DDAIF), Ford Motor Co. (F), and BMW AG all produce lithium-ion batteries or use them in vehicles.
Electric vehicles are likely to be competitive with gasoline cars on an overall cost basis by 2022.
But companies like Arotech Corp. (ARTX) and Johnson Controls
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Inc. (JCI) are two big names in the battery industry, and are direct competition for Tesla in Li-ion battery production. Within its Battery and Power Systems division, Arotech manufacturers and sells Li-ion and Zinc-Air batteries and smart chargers for the military and to the private defense industry in Asia, Europe, and the Middle East. ARTX stock has gained over 33% year-to-date. Arotech has an average earnings surprise of over 156%, with Value and Growth Style Scores of “B.” Johnson Controls offers a portfolio of Li-ion battery technology for a range of vehicles, including advanced start-stop vehicles, HEVs, micro-hybrid vehicles, and PHEVs. A Value Style Score of “A,” and its Forward P/E of 11.35, make it a solid pick for value investors. JCI has gained almost 14% year-to-date. With the increasing use of Li-ion batteries in electric vehicles and consumer electronic, the demand is expected to continue to rise. Investors who are interested in the electric vehicle industry would be wise to consider Li-ion battery makers for their portfolios.
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Tesla When it recently made a bid for struggling solar energy company SolarCity Corp. (SCTY), Tesla Motors (TSLA) explained that its “mission has always been tied to sustainability. [They] seek to accelerate the world’s transition to sustainable transportation by offering increasingly affordable electric vehicles.” The company has become one of the biggest players in the electric vehicle market over the course of its 13-year history, and has dedicated much time and effort in making their mission a reality. Today, Tesla has delivered over 100,000 of its flagship Model S cars, but there is much more to its story than that, and the company has its eyes set on much bigger things in the future.
History Incorporated on July 1, 2003, Tesla was originally founded by Martin Eberhard and Marc Tarpenning. During a three-year stretch from its founding until 2007, Eberhard served as CEO, while current chief executive Elon Musk was the chairman of the board. Eventually, Tesla’s board of directors asked Eberhard to resign. He stayed at the company as “President of Technology” before ultimately leaving the company with Tarpenning a few months later. Elon Musk eventually took over the company in 2008, and he quickly began injecting millions of his own personal wealth into Tesla to save the company from bankruptcy. He also oversaw product design on the Roadster, which was Tesla’s only model at the time and would remain its exclusive vehicle until 2012. During these initial years, Tesla struggled with high costs and low revenue, and the company went through several major firings associated with underperformance. In fact, as soon as Musk took over in 2008, he fired nearly 25% of Tesla’s staff. It was not until 2012 and the introduction of its Model S vehicle that Tesla would see sales pick up and its financial situation stabilize.
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Vehicles Tesla currently has two models on the road right now, with another in production. • Model S: The Model S is a four-door, all-electric sedan with an average range of 290 miles on a single charge. The car boasts zero tailpipe emissions and its current base price is $70,000. • Model X: The Model X is essentially Tesla’s SUV version of the Model S. It is slightly larger, seats seven people, and has an average range of 260 miles on a single charge. Its current base price is $80,000. • Model 3: Preorder sales for the Model 3 were opened a few months ago, and the car is seen as Tesla’s first model that is affordable for the average driver. With tax rebates, its base model will cost less than $30,000 and can be purchased with just $1,000 down. In its first week of sales, Tesla received over 300,000 preorders for the car.
Other Services In addition to its vehicles, Tesla makes much of its revenue from individually selling the rechargeable batteries it uses in its cars. Tesla plans to ramp up its sale of Li-ion batteries with its aforementioned Gigafactory. By 2020, Tesla expects the annual Li-ion battery production of the Gigafactory to exceed the global production in 2013. The factory will reportedly produce enough battery packs to allow Tesla to build around 500,000 electric cars per year by 2020. Tesla also operates several services focused on the maintenance of its cars. Owners can service their Tesla cars at the company’s own stores, its number of Tesla Service Plus locations, or through its Tesla Rangers mobile servicing program.
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Tesla has also developed a number of public charging stations that allow owners of its vehicles to “refuel” while away from home. The company currently has 613 stations with a total of 3,628 chargers throughout the U.S. Elon Musk has promised that the number of public chargers will double by the end of 2017.
Tesla’s Future While Tesla remains a loss-making company, its biggest challenge going forward will be turning a profit despite the high costs of its vehicle production and manufacturing. In each quarter of 2015, Tesla reported higher net losses than in the corresponding quarter in 2014. At the end of 2015, Tesla had $1.2 billion in cash or cash equivalents, which was down from $1.91 billion in 2014. The company has been getting further away from profits, and Mr. Musk has said that he doesn’t expect the company to be in the black until the Model 3 hits full-scale production in 2020. With this in mind, can Tesla stay on track with this schedule? Is there anything the company can to do to hasten the production of the Model 3? Another thing to consider is that Tesla’s sub-$30,000 price point for the Model 3 was based on a few federal tax rebates. Some analysts have noted that these rebates could be used up by the time Tesla starts to deliver the Model 3, leading many to wonder whether Tesla will be able to lobby the government to extend these benefits. While the Model 3 may eventually be Tesla’s profit machine, it has only caused financial concerns in the short-term. Tesla expects operating costs to increase by 20% in 2016 due to increased costs associated with the Model 3’s launch.
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Should You Buy TSLA Stock? In its most recent quarterly report, Tesla posted a loss of $1.54 per share, which missed the Zacks Consensus Estimate of -$1.16 by nearly 33%. Despite this, Tesla was able to beat revenue expectations, reporting figures of $1.563 against our consensus estimate of $1.516. Once again, investors are getting mixed signals from this company. While revenues were better than expected, shares of TSLA fell about 4.3% in the week following the report. As of August 2016, the stock is down about 4% on the year. Add this lackluster momentum to Tesla’s Style Score grades of “F” for Value and Growth, and it’s clear that this stock simply isn’t a promising pick right now.
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The Future of the Electric Vehicle The electric vehicle industry has come a long way over the past five years or so. We now have many more choices, better prices, improved performance, more charging stations, and better range. Despite these improvements, much more needs to be delivered to consumers in order to make electric vehicles gain appeal within the broader auto market. That being said, many see the industry experiencing rapid growth over the next decade as consumer needs are met.
Cost A lot of the pricing behind electric cars is driven by the Li-ion battery packs powering them. Right now in 2016, the cost stands at about $350, according to data from Bloomberg New Energy Finance (BNEF), down from 2010’s cost of $1000 per kilowatt hour. According to NRDC.org, scientists, industry experts, and automakers agree that battery prices will head below $150 per kilowatt-hour in the next decade. Experts believe that electric vehicles will succeed in reaching the mass market at this price point. The cost per kilowatt hour has been going down at a fast pace over the last two years, so this threshold could be Nissan, passed within a few years. As the cost per kilowatt hour falls, electric vehicles become more competitive with their gasoline-fueled rivals on the price front. BNEF estimates that electric vehicles will be competitive on an overall cost basis (which includes car price and fuel costs) compared with gasoline cars by 2022. The group also sees annual electric vehicle sales topping $40 million by 2040.
Chevrolet, Audi, Ford, and even Aston Martin and Porsche are expected to create 200+ mile range EVs before 2020.
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One notable threat to the demand of EVs on the cost front is cheap oil, which stands to hurt cheap electric vehicles the most. This is because of the fact that most consumers purchasing an affordable EV do so because of the potential savings it can bring over time. Oil is not a renewable fuel though, so the EV market stands to have a significant advantage in the auto market as long term oil prices trend upwards.
Charging Stations One thing that has historically held the electric vehicle industry back is the lack of charging stations. This is one of the main reasons why everyday car buyers opt out of buying PHEVs. Several notable companies have been building charging stations, including Coca-Cola (KO), Alphabet Inc.’s (GOOGL) Google division, Nissan (NSANY), BMW, Volkswagen (VLKAY), Tesla, and even Walgreens (WBA). According to the Alternative Fuels Data Center, there are 13,824 electric stations and 34,057 charging outlets in the US. To put this into perspective, there were 114,533 gas stations in the US at the end of 2012. At-home charging stations can take between 4-20 hours to fully charge your vehicle. As one might expect, an away-from-home charging station is faster, and it takes about half an hour to charge a vehicle 80% if you choose to use the DC Quick-Charge (DCQC) method. This still isn’t fast compared to pumping gas, but if you consistently charge at home and need to pump after using up most of your battery charge on a long trip, 30 minutes seems like a fair wait. As the demand for EVs grow over time, there will need to be more charging stations built. The infrastructure necessary to support the growing number of EVs could cost billions of dollars. This is because of the fact that labor, permitting, and installation of a quick charger tends to cost a lot of money, and a 2014 survey by the Rocky Mountain Institute states that those three factors could cost more than the material cost of the charging station. When all costs are added up, the group estimates that the final cost could be $50,000 to $100,000 for the installation of a level 3 charging platform.
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Range The distance an electric vehicle can drive correlates with the number of charging stations available. Since many PHEVs have a max range of about 100 miles, they aren’t practical enough for the average consumer, especially because gas stations still outnumber charging stations. One other note to consider is the fact that when EVs go mainstream, there may be too many people charging their cars, creating a long wait for anyone hoping to refuel. To confront this, EVs will have to have a longer range so that the vast majority of people will opt to charge at home as opposed to going to a pump. Fortunately, significant progress is underway, and Nissan, Chevrolet, Audi, Ford, and even Aston Martin and Porsche are expected to create 200+ mile range EVs before 2020. Lack of range is one of the biggest reasons for why people opt out of going electric. If this problem gets fixed, then the demand for PHEVs stands to increase significantly. Auto-manufacturers are investing billions of dollars into electric Ford (F) looks vehicle research, and are dedicating a significant portion of their like a viable vehicle lineup to electric vehicles. investment Ford, for example, sees 40% of its car lineup utilizing electric vehicandidate when cle technology by 2020. By this observing its year, Honda also expects to have financial a large portion of electric vehicles in its lineup, and CEO Takahiro performance. Hachigo announced that twothirds of its vehicles will be electrified by then. Large manufacturers are already gearing up to accelerate electric vehicles, and the result of these investments will include vehicles that are more efficient and have a longer driving range.
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When Will Electric Vehicles Go Mainstream? BNEF sees the possibility of EVs becoming cheaper than gasolinefueled cars between 2020 and 2030. The technology is improving every year, and the price decline per kilowatt hour for battery packs has been accelerating over the last few years. In fact, since 2010, the price per kilowatt hour has decreased by more than 65%. Aside from costs, we are now seeing large manufacturers take an initiative in investing heavily in advancing electric vehicle technology. As these companies push the electric movement forward, one can assume that the vehicles will become mainstream sooner rather than later. Consumers can expect a larger variety of cars that boast driving ranges of over 200 miles. As performance and driving range increases while cost decreases, electric vehicles stand to become a coveted choice among consumers.
How to Invest Now Besides battery companies like Arotech and Johnson Controls, investors should also look towards traditional auto makers like Ford. The company is investing $4.5 billion in EV solutions and it is adding 13 new electric vehicles to its product portfolio over the next few years. Right now, the car maker has three top-of-the-line electric options to choose from: the 2016 Focus Electric, the 2017 Fusion Hybrid, and the 2016 C-Max Energi. With this, Ford hopes to have 40% of its vehicle line up going electric by 2020. While the company is clearly working towards making great strides on the EV front, Ford looks like a viable investment candidate when observing its financial performance. Ford looks pretty cheap valuation-wise, as it trades at a forward PE of about 6. The automaker also does well to compensate investors for their risk with a 4.93% dividend yield.
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While net income numbers have not been very consistent, the car company has done well with regards to keeping sales and gross profit levels high over the years. Ford shares consistently trade at a fraction of the sales it churns out, and this suggests that there is value in owning the stock.
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