The electric vehicle (EV) sector has been popular with investors since Tesla(NASDAQ: TSLA) paved the way with its business and stock performance over the past two years. Everybody wants to find the next company that could similarly return more than 1,500% over the next two years.
But seasoned investors know that life-changing wealth is best built by investing for the long term. And while Tesla may still be a market-beating investment for years to come, many investors are looking to get in on the ground floor with other companies in the sector. The three names below provide a diverse mix that, as part of a high-risk, aggressive portion of a portfolio, could provide outsized returns over the long haul.
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Nio: Tapping the largest markets
Chinese EV maker Nio(NYSE: NIO) is based in the largest auto market in the world. Tesla put its second manufacturing facility in Shanghai for a reason, after all. Nio, along with its state-owned manufacturing partner JAC Motor, began expanding its manufacturing base in the city of Hefei, China in April 2021. That work will officially double the company's capacity to 240,000 vehicles per year, though the company has said with additional shifts and other arrangements, total capacity could reach 300,000 annually.
Nio is planning on selling those vehicles beyond China as well. Though China may be the biggest auto market, Europe is currently the world's fastest-growing EV market. In 2020, Europe had the largest annual increase in battery electric vehicles, according to the International Energy Agency. Nio is trying to take advantage of that with a move into Norway this year, and plans to begin sales in Germany next year.
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Nio isn't just looking at a European business as a place to sell vehicles. In Norway, it has set up a division that includes its Nio House community and plans to establish its Nio Power infrastructure there. Nio Power includes a battery swap subscription service where customers pay a recurring fee to be able to quickly pull into stations and have a fully charged battery installed in a matter of minutes.
Nio hopes the additional volume of sales will bring it the scale it needs to reach profitability. It has said it is adding three new products next year as well, including the ET7 luxury electric sedan that will mark its first model beyond an SUV design. Investors are counting on Nio growing successfully. The company already has a market cap of more than $60 billion. But a successful business that scales up over time could justify that valuation. Shares are down more than 25% since July 2021, providing an opportunity to start a long-term position.
Arrival: Taking a unique approach
U.K.-based EV maker Arrival(NASDAQ: ARVL) has a different business strategy than most. The company makes electric buses and delivery vans, and has plans for a car designed to be used for ride-hailing services. It announced plans for the car earlier this year in a partnership with Uber Technologies.
Rather than utilizing centralized manufacturing facilities, Arrival is setting up "microfactories" near customer locations. Its first two plants in the U.S. are in South Carolina and North Carolina, the latter of which is to supply early investor and future customer United Parcel Service. Arrival has said UPS has plans to order at least 10,000 of its electric delivery vehicles. All told, the company said in its second-quarter financial update that as of August 2021, Arrival has order interest or letters of intent for almost 60,000 vehicles.
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Arrival is building the microfactories to supply this potential demand. They can be built in existing warehouses in some cases, located near customer fleet centers, put in service more quickly, and constructed with a lower amount of capital than traditional factories. Arrival has a large amount of operational and financial risk, as it is already valued with a market cap of about $9 billion. But the stock could add diversity to an EV portfolio if one is willing to take on the risks.
ChargePoint: Growing a charging network
Leading EV charging network company ChargePoint Holdings(NYSE: CHPT) offers another avenue of diversity with a stake in the EV charging space. At the end of its fiscal 2022 second-quarter period (ended July 31, 2021), ChargePoint had almost 120,000 active charging ports in the U.S., Europe, and India. It reported year-over-year revenue growth of 61% in that period, and raised its full-year revenue guidance by 15% to a range of $225 million to $230 million.
The majority of that revenue currently comes from building out the network hardware. Longer term, however, investors are looking for subscription revenue that comes from software services for its commercial, fleet, and residential customers. That will be used for scheduling and fueling optimization in addition to maintenance service subscriptions.
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ChargePoint is the leading charging hardware provider in North America, and is expanding in Europe. There's no question that if EVs become as ubiquitous as many predict, there will be much more expansion to come. The investment thesis, however, needs to also rely on the recurring revenue that ChargePoint management predicts is coming. That's where much of the risk lies with ChargePoint. But if investors are looking to have a stake in EVs for the long haul, including charging infrastructure makes sense. As with the EV manufacturers themselves, there will be winners and losers, and these investments all belong in the more speculative portion of a portfolio.
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Howard Smith owns shares of Arrival, ChargePoint Holdings Inc., and NIO Inc. The Motley Fool owns shares of and recommends NIO Inc. and Tesla. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.
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