While there are a number of intriguing trends worth investing in this decade, few offer the transformative growth potential of the electric vehicle (EV) industry.
According to a report released in late October by Beyond Market Insights, the global EV market is expected to deliver a 22.5% compound annual growth rate between 2022 and 2030. In dollar terms, we're talking about global EV sales totaling approximately $1.1 trillion by 2030.
But as we know from watching a variety of next-big-thing investments take shape over the past couple of decades — e.g., the internet, business-to-business e-commerce, genomics, and 3D printing — not every company is going to be a winner.
As we lift the curtain on a new year, one EV stock looks ripe for the picking, while another two widely owned electric car stocks could have investors stomping the brakes.
EV stock No. 1 to avoid like the plague in 2023: Tesla
The first electric-vehicle manufacturer to actively avoid like the plague in the new year is none other than the world's largest automaker by market cap, Tesla (TSLA).
Clearly, Tesla has done some things right, or it wouldn't be the world's most-valuable automaker by market cap. It's the first automaker to successfully build itself from the ground up to mass production in more than a half-century, with the company delivering more than 1.3 million EVs in 2022.
Tesla has also gotten over the recurring profitability hump. The company no longer needs to rely on selling renewable energy credits to other automakers to ensure it's profitable. In each of the past five quarters, Tesla has produced a generally accepted accounting principles (GAAP) profit ranging between $1.62 billion and $3.32 billion.
But even with these positives, there are more red flags for Tesla than at any point in its history.
For example, we're witnessing firsthand that Tesla isn't immune to the challenges new and legacy automakers are dealing with. Persistent supply chain issues, high inflation, and a weakening U.S. and global economy are all weighing on production and demand for EVs.
To add to this point, Tesla has cut the price of its flagship Model 3 sedan and Model Y SUV in China twice over the past couple of months, while also reducing the price of these models in the United States. Fast-growing businesses with no demand issues won't be cutting prices when inflation is well above its historic average. These price cuts are a gigantic clue that Tesla is dealing with an inventory issue that's unlikely to resolve anytime soon.
However, the biggest issue for Tesla starts at the top. As I've stated, Elon Musk is a legal and operating liability for the company he runs. He's drawn unwanted attention from securities regulators on more than one occasion, and his promises for when new technology will become reality are rarely (if ever) met. Level 5 full self-driving has been promised as being one year away since 2014, and Musk's call for 1 million robotaxis to be on the road is years late.
These promises are built into Tesla's valuation, and we're beginning to see the company's share price deflate as many of these prognostications go unfulfilled.
EV stock No. 2 to avoid like the plague in 2023: Rivian Automotive
The second electric vehicle stock that investors should strongly consider avoiding like the plague in the new year is Rivian Automotive (RIVN). Rivian was arguably the hottest initial public offering of 2021, given that its stock skyrocketed in the days following its debut.
Similar to Tesla, Rivian does have factors working in its favor. For instance, it landed an order from Amazon for 100,000 electric delivery vans in September 2019. Even though Amazon is known for aggressively reinvesting its operating cash flow, this is a sizable order in nominal-dollar terms, and it instantly legitimized Rivian as a business.
The other big differentiator for Rivian is the company's R1T pickup. Whereas other automakers have unveiled versions of heavy-duty EV trucks, such as General Motors‘ Chevy Silverado EV and Ford Motor Company‘s Lightning EV, the R1T is in a class of its own as the only true luxury pickup that's still fully capable of going off-road. With minimal in-class competition, Rivian would appear to be set for strong growth in R1T sales.
However, there are also clear warning signs that Rivian's still-inflated valuation could head even lower in 2023. To start, the company slightly missed (24,337 EVs produced) its 25,000 EV production target for 2022 that it had reiterated multiple times last year. This would imply that supply chain issues remain a serious problem that won't be corrected anytime soon.
Although Rivian ended September with a war chest of approximately $14 billion in cash, cash equivalents, and restricted cash, the company is also burning through its capital at an alarming rate. Through the first nine months of 2022, Rivian's cash and cash equivalents shrank by $4.9 billion.
Keep in mind that the company is also outlaying $5 billion to construct a manufacturing plant in Georgia, which means its seemingly healthy cash balance is likely to shrink considerably this year.
Investors shouldn't overlook Rivian's attempt to raise its prices in March 2022 either, which eventually backfired. Higher costs are constraining Rivian's vehicle margins, and the company may risk pricing buyers out of its vehicles if it keeps increasing its prices.
With another large operating loss almost certainly on the docket for 2023, Rivian is an EV stock that can be easily avoided by investors.
The EV stock to buy hand over fist in the new year: Nio
On the other side of the aisle is an electric vehicle manufacturer that's been beaten down and now looks ripe for the picking. I'm talking about China-based EV stock Nio (NIO).
The biggest issue Nio has been dealing with is China's zero-COVID mitigation strategy. Locking down select provinces to contain COVID-19 outbreaks led to ongoing supply chain disruptions and inconsistent EV demand throughout most of 2022. Whereas Nio's management anticipated triple-digit growth in production, it had to settle for delivering 122,486 EVs, which was a 34% improvement over 2021.
However, the exciting news for Nio and its shareholders is that China has finally moved on from its zero-COVID strategy. While the next couple of months could be dicey as infection spreads throughout the country and residents build up natural or vaccine-driven immunity, the stage is now set for supply chains to return to some semblance of normal by the second half of 2023. It wouldn't be a surprise if Nio increased its monthly production from the record 15,815 EVs reported in December 2022 to roughly 50,000 EVs by the end of the year.
And China is the world's largest auto market. By 2035, more than half of all new vehicles sold are expected to run on some form of alternative energy. There's plenty of market share up for grabs in China's nascent EV market, which has the potential to lead to sustained double-digit sales growth for up-and-comers like Nio.
Despite being founded less than a decade ago, Nio is already out-innovating some of its competition. Last year, the company's ET7 and ET5 sedans rolled into showrooms with the potential to achieve 621 miles of range, if fitted with the top-tier battery pack. That's nearly double the range of Tesla's Model 3 sedan. Introducing at least one new EV annually, as well as focusing on middle-and-upper-income consumers with its premium lineup — high earners are less likely to alter their spending habits during economic hiccups — looks to be a smart strategy.
Additionally, Nio is winning with its out-of-the-box thinking. In August 2020, the company introduced its battery-as-a-service (BaaS) subscription. With BaaS, Nio EV owners can charge, swap, and upgrade their batteries at the more than 1,200 Power Charger stations and over 1,300 Power Swap stations the company has deployed, as of the end of 2022. BaaS is generating high-margin recurring revenue for Nio, as well as keeping its early buyers tied to the brand.
With a strong production ramp-up seemingly likely, look for Nio's fortunes to improve in 2023.
Originally published on Fool.com
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com, Nio, and Tesla. The Motley Fool has a disclosure policy.