The future of the electric vehicle (EV) market has excited many ESG investors, and for good reason: It’s a classic example of an investment trend that has both substantial environmental benefits and significant growth potential. But for all the buzz, many investors may be viewing the opportunity set with too narrow a lens.
Most headlines and some retail investors associate electric vehicles with a single poster child company: Tesla. While Tesla’s history of innovation is indeed impressive, the investment opportunities that will stem from electric vehicle adoption and innovation are far more expansive.
This summer, with the help of our interns, we completed a deep dive into researching the growth potential of the electric vehicle market. A few takeaways demonstrate just how big the investment potential is, how fast the trend is moving and how far the investment opportunities expand:
- EV growth is still in the early innings. According to a Bloomberg New Energy Finance report, EVs will account for 3% of global new-car sales in 2020. But the report estimates that EVs will account for 58% of new car sales globally and 31% of the global car fleet by 2040. EVs could also account for 67% of municipal buses and 24% of light commercial vehicles by then.
- EV adoption will have a substantial environmental impact. The Bloomberg reports estimates that EV use will remove 17.6 million barrels of oil demand per day.
- Battery quality and prices are improving, which could ramp up adoption further. Batteries are the “costliest” element of a battery electric car, representing 30-40% of the production price of the vehicle. Prices for batteries are coming down, which will make EVs more cost competitive. If battery prices continue to come down, electric vehicles could achieve price parity with combustion engine vehicles as early as 2023. Keep an eye on Sept. 22, 2020, as Tesla may announce a new innovative battery on its self-proclaimed “Battery Day.” Chinese battery maker Contemporary Amperex Technology Co. Limited (CATL) has already announced a 1.2 million-mile battery that costs only 10% more than current electrical vehicle batteries.
- Buses are another growth market for electric vehicles. Much focus has been placed on cars, but if elected, Joe Biden’s climate plan calls for the adoption of 500,000 electric school buses in the U.S. By our estimate, the conversion to electric school buses is a $60 billion to $115 billion revenue opportunity for companies tied to the trend.
- Biden’s climate plan benefits other industries tied to the EV transition. This is not an endorsement of either presidential candidate. Dana does not weigh in on political opinions, but we do analyze the investment opportunities from either election outcome. Biden’s climate plan could benefit many businesses tied to EVs. Along with transitioning the school bus fleet, the plan calls for investing in electric light-rail networks in large cities, restoring the full EV tax credit for buyers, updating the government vehicle fleet with 3 million EVs, developing 500,000 public EV charging stations by 2030 and incentives to encourage more domestic research and development and production of EVs, charging infrastructure and batteries. Investment opportunities from the plan could include automakers, bus companies, domestic EV charging companies and domestic battery manufacturers.
- Investment opportunities abound. There is a wide range of investment opportunity stemming from EV adoption. As we mentioned earlier. Tesla is not the only way to invest around EV growth. Among automakers, Tesla is the largest domestic player, commanding 32% of all U.S. EV sales since 2010, but other automakers could also benefit from wider adoption. Further opportunities lie in other industries tied to EVs. A few of those opportunities include companies tied to: battery production, autonomous driving vehicle technology, hydrogen fuel-powered vehicle manufacturing, lithium/cobalt suppliers, semiconductor manufacturers, electric vehicle and hydrogen fuel cell charging stations, renewable energy technology and vehicle part manufacturers.
Bottom line: EV growth is just beginning and industries tied to it are still evolving. As adoption continues the investment opportunities are wide. We expect EV to be a long-term trend within ESG portfolios.
Dana Large Cap Equity Fund top-ten holdings as of June 30, 2020, subject to change: Apple, Inc. (2.91%), Microsoft Corp (2.86%), Amazon.com, Inc. (2.85%), Alphabet Inc. CL A (2.44%), LAM Research Corp. (2.10%), Akamai Technologies, Inc. (1.93%), The Home Depot, Inc. (1.90%), UnitedHealth Group, Inc. (1.89%), D.R. Horton, Inc. (1.89%), Morgan Stanley (1.89%)
Dana Small Cap Equity Fund top-ten holdings as of June 30, 2020, subject to change: HMS Holding Corp (2.32%), Ligand Pharmaceuticals, Inc. (2.30%), Horizon Therapeutics PLC (2.26%), Upland Software, Inc. (2.23%), MedPace Holdings, Inc. (2.13%), Itron, Inc. (2.08%), Omnicell, Inc. (2.06%), Perficient, Inc. (2.05%), Ultra Clean Holdings, Inc. (1.95%), Rapid7, Inc. (1.93%)
Dana Epiphany ESG Equity Fund top-ten holdings as of June 30, 2020, subject to change: Apple, Inc. (2.83%), Amazon.com, Inc. (2.78%), Microsoft Corp (2.68%), Alphabet, Inc. CL C (2.63%), Akamai Technologies, Inc. (2.08%), Lam Research Corp (2.06%), PayPal Holdings, Inc. (2.00%), Accenture PLC CL A (2.00%), W.W. Grainger, Inc. (2.00%), CDW Corp (1.98%)
Current and future portfolio holdings are subject to risk.
10798975-UFD-08/13/2020