Throughout its more than 100-year history, the automotive industry has carved out a role as the powerhouse of economies throughout the world, employing millions of workers and billions of dollars of capital in the name of improving individual mobility.
The companies behind this driving force in countries ranging from Japan to Germany have turned into household names, while a person’s choice of vehicle has become as integral to their identity as the clothes they wear.
Yet the engine room of many economies has stuttered somewhat over the past year and a half.
The onset of the pandemic marked the beginning of what has turned out to be one of the most challenging periods in the industry’s history. Downsizing, strategic rethinks, dampened demand and supply-chain issues have dogged production and hurt stock prices – at least for the traditional automakers.
The inability to source crucial semiconductors – used throughout modern car production for everything from the braking systems to the satellite navigation – has forced car companies to idle production lines and lower targets, with the impact likely to be felt well into next year.
Amid the chaos, traditional auto manufacturers such as Ford (F) or Toyota (TYT) have come under threat from a new generation of car-makers. Electric vehicle (EV) native firms such as Tesla (TSLA), Rivian (RIVN) and China’s NIO are all becoming stock-market darlings even as their fundamentals fail to match those of the incumbents.
Auto industry stocks have faced a radical shake-up in recent years, with the largest companies by revenue no longer necessarily the largest by market capitalisation as investors move in droves to invest in auto companies deemed to be more prepared for the coming EV future.
But what are the best auto shares to buy as we head into 2022, and which traditional car manufacturer stocks are best placed to benefit from the move to electrification?
Semiconductor chip shortages still pose risks
The current risks facing the automotive industry can be split into distinct camps, based on whether the stock is a more traditional manufacturer facing a complex- and expensive- transition away from internal combustion engines or a newer, EV-focused company.
That said, all companies in the market are equally impacted by the ongoing semiconductor chip shortages and other product crunches in the global supply, which have impacted production across the industry.
Analysts at Dutch bank ING said in a report that while supply pressures are set to ease, the shortage will likely still impact the market into next year.
“At this point, we believe the broad industry guidance is that shortages will continue to occur to some extent for the rest of this year, and potentially into and even through 2022,” the ING analysts said.
ING also added that as the Taiwan Semiconductor Company (TSMC) said it aims to hike its microchip units output by close to 60% year-on-year this year, it is “relieving some of the supply pressures starting this quarter”.
“We also note that the impact of the chip shortages is uneven across car manufacturers, and each of them is striving to manage the situation in their own way – and, importantly, prioritising the production of higher-margin models to minimise the impact on profitability, which, given the aforementioned robust consumer demand, should be less impacted than production volumes,” ING concluded.
Shift towards electrification
For traditional auto sector stocks, another major risk acknowledged by top executives is the threat of EV native companies such as Elon Musk’s Tesla becoming the dominant force in the industry as more consumers switch over to electric cars.
In the beginning of 2010s electric cars were still regarded as a long shot for mass production and adoption, with the energy density and efficiency of electric batteries lagging far behind that of petrol-powered vehicles.
Yet fast forward to 2021, and Elon Musk’s Tesla corporation has since become the largest automotive stock in the world by market capitalisation, recently acknowledged as the first company in the sector to gain a valuation of over $1trn amid frenzied growth and investor support over the past few years.
The company now has a valuation more than five times that of its nearest competitor, Toyota, even though the ever-present Japanese marque has revenue still multiples ahead of Musk’s firm
Meanwhile, EV truck manufacturer Rivian secured a valuation of over $100bn in its recent initial public offering (IPO), despite having yet to launch a single product officially for the mass market.
Key automotive stock forecasts
Electrification is set to be the dominant factor behind auto industry stocks in the coming decade, as more manufacturers move to make EVs the majority – if not the entirety – of their product line-up.
According to Statista, the growth of light vehicle sales is set to be around 4% by 2023, with around 88 million units sold, ahead of the 2019 level of 80 million, with 15.4% of vehicles produced expected to be EVs by that year.
The move by original equipment manufacturers (OEMs) towards EVs will be the major driver of automobile sector share prices, as confirmed by the International Energy Agency (IEA), which stated that the overwhelming majority of the largest companies have committed to increase the number of EVs they produce as a percentage of their line-up by the end of the decade.
“OEMs are expected to embrace electric mobility more widely in the 2020s. Notably, 18 of the 20 largest OEMs (in terms of vehicles sold in 2020) – which combined accounted for almost 90% of all worldwide new car registrations in 2020 – have announced their intentions to increase the number of available models and boost production of electric light-duty vehicles (LDVs),” the IEA said in a report.
“A number of manufacturers have raised the bar to go beyond previous announcements related to EVs with an outlook beyond 2025. More than 10 of the largest OEMs worldwide have declared electrification targets for 2030 and beyond,” the IEA report concluded.
Car stocks to watch: Biggest by market cap
As investors look towards an EV future, stock valuations of automotive manufacturers have undergone a period of flux, with the two largest companies by revenues – Toyota and Volkswagen – no longer being the highest-valued firms by market capitalisation.
The shift to EVs has pushed more investors to back newer companies that have surged in value as incumbent companies’ stocks have failed to keep pace.
Listed below are the top-five car company stocks by market capitalisation.
The firm most responsible for bringing EVs into the mainstream, Tesla (TSLA) is now the largest automotive manufacturer in the world, with a market capitalisation of over $1trn and an army of loyal investors backing founder Elon Musk to help revolutionise personal transportation.
With a strong line-up and the recently released Model Y set to become the standard bearer in the popular crossover in addition to a forthcoming pick-up truck exciting customers in the company’s home market in the US, Tesla has everything going for it as mainstream consumers become increasingly more comfortable with the idea of EVs.
Japanese car-maker Toyota (TM) is renowned the world over for producing some of the most durable and reliable vehicles in the business, with a line-up that encompasses everything from the rough-and-ready Land Cruiser to the world’s best-selling brand in automotive history: the Toyota Corolla.
While it may have lost its crown to Tesla as the largest car manufacturer in the world, it retains its position at the top of the revenue table with $245bn in 2020, according to Statista.
The firm produces everything from cars to buses, trucks, forklifts and electric bikes, and is currently engaged in a joint venture with Germany’s Daimler to produce luxury EVs under the Denza brand in China.
The largest manufacturer in the storied German automotive industry remains a brand beloved across the world, synonymous with high-quality, reasonably priced vehicles – a reputation which helped it post revenues of over $240bn last year.
While the Volskwagen stock (VOW3.DE) suffered over the past few years due to an emissions-cheating scandal that cost the company millions of dollars in fines and significant reputational damage, CEO Herbert Diess has committed to challenging Tesla for dominance in the EV market in the coming years.
Stuttgart-headquartered Daimler (DAI.DE) has been around since the invention of the automobile in the 19th century, and as such, the home of the luxury Mercedes-Benz brand is steeped in a tradition of quality.
The company is also a leading manufacturer of commercial trucks and other vehicles, and has made significant strides towards electrifying its product range with flagship releases such as the Mercedes EQ luxury saloon.
Automotive companies are major constituents of many global stock indexes. Several of the largest firms in the world by market capitalisation, including Tesla and Toyota, operate within the sector.
Automotive stocks took a steep dive in March 2020 as production lines ground to a halt at the start of the pandemic, but sales have since rebounded and supply-chain issues look set to ease going into 2022.
The sector has been helped by the sharp rise in Tesla, which topped a valuation of $1tn in the final months of 2021.
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