My top EV stocks to buy in 2023 (and it’s not even close)

2020 and 2021 saw a flurry of investment in electric vehicles (EVs). Almost every major legacy automaker has implemented new programs centered around reducing emissions and improving sustainability.

However, in 2022, the automotive industry landscape, including EVs, has been significantly impacted by rising interest rates, inflation, supply chain issues, and an increasingly crowded list of competitors.

Many legacy automakers find themselves overextended in the same way that consumer spending is taking a hit. Just in time to reduce consumer spending. The consumer car market is cyclical and heavily affected by rising interest rates, making car financing more expensive. Given that most cars are bought with debt, this is a major headwind for the automotive industry going forward. Combine this headwind with the fact that many of these legacy automakers could take years to have profitable EV lines (not to mention reliable battery production and supply chains). Combined, it’s a one-two punch of slowing growth and shrinking margins.

Poor near-term prospects, but potential benefits Tesla (TSLA 1.12%) than any other automaker. In hindsight, the company’s valuation far outperformed itself, but now Tesla’s stock is down 72% year-to-date (he’s down 42% in the last month alone). Here’s why Tesla is the top EV stock to buy in 2023.

Image Source: Getty Images.

Tesla’s margins can afford to take a hit

Rising interest rates have led to an imbalance between supply and demand, putting pressure on automakers to offer discounts. Tesla offered a $7,500 discount in December, but Tesla is notorious for not offering discounts, so the move may have been perceived as a sign of weakening demand.

As demand shrinks, automakers are likely to face downward pressure on prices. Profit margins are expected to decline across the board next year.

TSLA Operating Margin (TTM) Data by YCharts

A big advantage of Tesla is that it has the second highest operating profit margin among the ten major automakers (the second highest is Ferrari, with a much lower delivery volume). High profit margins give Tesla a much-needed buffer to handle margin compression relatively better than its competitors.

perfect balance sheet

Not only is Tesla a much more profitable business than its competitors, it also has an impeccable balance sheet. Tesla’s total long-term net debt is negative $18.7 billion. This means you have more cash, cash equivalents and marketable securities than you have debt. Among other major automakers, Chinese automakers are the only ones with negative total net long-term debt balances. BYD When BMW.

Data Source: YCharts. Data as of December 28, 2022.

As you can see from the table above, many of the major automakers have net debt equal to or greater than their entire market capitalization, resulting in high debt-to-equity and financial debt-to-equity figures. Toyota, Volkswagen, Mercedes-Benz Group, GM, Ford and Honda rely heavily on debt to run their businesses.

Rising interest rates are a double problem for these companies. They increase capital costs, which in turn lead to higher operating costs. When Rising interest rates make it more expensive for customers to finance new cars. Tesla’s cash position gives it a unique edge over its competitors in any environment. However, its advantage is strengthened in times of rising interest rates.

historically low rating

For years, Tesla had a nosebleed valuation that could only be justified by overgrowth. The past four years have been transformational years for Tesla. Although the company is still growing rapidly, it is now profitable, has strong operating margins, and generates large amounts of free cash flow (FCF), allowing it to avoid excessive debt.

Tesla’s crashing stock price, combined with its profitability, gives the company the cheapest valuation so farAs you can see in the charts below, revenue and net profit are up, while price vs. free cash flow and price vs. earnings ratio are down.

TSLA Revenue (TTM) Data by YCharts

Based on estimated earnings, the company has an expected price/earnings ratio of 27.3, which isn’t just low by Tesla’s standards. It’s in the ballpark of many large, strong, low-growth consumer goods companies.

TSLA PE ratio (forward) data by YCharts

Notable risks

If supply continues to outpace demand, Tesla’s profit margins could fall. Earnings declined for any of several reasons, including reduced production out of China due to problems caused by COVID-19, leadership risks associated with Elon Musk’s Twitter involvement, and the ensuing impact on Tesla. could increase its expected P/E ratio. brands, and any number of unforeseen risks.

However, Tesla stands out as a much better acquisition target than its competitors. This is because high profitability can be maintained even if the profit margin declines. It has the strength of its balance sheet to weather a recession and is already expanding its market size on a global scale. A highly efficient EV procurement, production, and delivery network that overwhelms other companies.

Tesla’s stock isn’t cheap, but the sharp decline in the stock price and the company’s fundamentals make it the most attractive time to buy since the June 2010 initial public offering.

Tesla has transformed into a mature and profitable company. The timing of the slowdown in the auto industry is never a bad thing for Tesla’s competitors, but it’s less of a concern for Tesla. Had the economy slowed down a couple of years ago, Tesla would have been in dire straits, but now the company is consistently positive about his FCF, so it can handle an industry-wide recession and Well positioned to gain market share.

All in all, now is a great time for long-term investors to consider adding Tesla stock to their diversified portfolios.