The electric vehicle (EV) startup space is fraught with risk and uncertainty. The vast majority of U.S. EV startups are burning through cash at an alarming rate while struggling to deliver vehicles to market. Going up against established automakers with decades of manufacturing expertise and vast financial resources is a monumental challenge. However, a few EV startups stand out from the pack and are positioned to thrive in the coming years.
As we head into the summer months, it’s time to take a hard look at your early-stage EV investments. The EV space is heating up, and market dynamics can shift rapidly. Some startups still only offer renders and unrealistic production timelines, while others are actually manufacturing and delivering vehicles. As an investor, you need to differentiate between speculative plays and companies poised to generate real revenues and potential profits. Let’s look at the two EV stocks to sell and then look at the ones you should buy instead.
EV Stocks to Sell: Faraday Future (FFIE)
Faraday Future (NASDAQ:FFIE) is a California-based company that’s designed, as is attempting to manufacture, luxury electric vehicles. Intrigued by its flagship FF 91 model touting advanced technologies and luxury appointments, I took a closer look at Faraday Future. Unfortunately, a number of serious red flags emerged.
Debuting in 2017, the FF 91 has seemingly been delayed indefinitely, with the company promising it’s around the corner for years on end. And even if production materializes, current market dynamics do not bode well for the FF 91’s $309,000 price tag. Today’s EV landscape offers comparable or superior vehicles at a fraction of the cost, obliterating any value proposition for FFIE’s long-promised flagship vehicle.
Perhaps more concerning to shareholders is the company’s cash burn rate. I think Faraday Future’s outsized cash burn raises questions about its sustainability. With losses exceeding $78 million last quarter and only $6.7 million remaining in the coffers, Faraday Future appears to be caught in a vicious cycle of value destruction and endless dilution just to stay afloat.
As competition accelerates in the EV arena, half-baked business models will be exposed and left behind. Despite early intrigue, I believe FFIE stock falls firmly into that camp at this juncture. The company lacks both the capabilities and financial footing to deliver on overzealous promises in an intensifying market. For those reasons, I cannot, in good faith, recommend FFIE as a viable electric vehicle investment.
The company needs a major infusion of capital and managerial expertise to right the ship – neither of which appears readily-available given its haphazard history. I would stay far away from FFIE stock at its present valuation. Any investment here is essentially a leap of faith that a phoenix will rise from the ashes – a bet you should be unwilling to make with your hard-earned capital.
Mullen Automotive (MULN)
Mullen Automotive (NASDAQ:MULN) presents a marginally more optimistic picture, but substantial risks remain for potential shareholders. On the surface, Mullen appears positioned as an early-stage EV startup with long-term possibilities. It aims to manufacture a range of electric vehicle models while expanding clean energy solutions. The company now produces and delivers two vehicles – the FIVE crossover SUV and the GO urban delivery van.
However, peeling back the onion reveals widening losses that undermine any sort of bullish thesis. Mullen loses money on every vehicle sold. The company then passes these losses onto shareholders through endless dilution – the same story as Faraday Future. Even if Mullen drives future manufacturing efficiencies to achieve profitability, current owners face significant value destruction headwinds.
Like Faraday Future, Mullen’s share price tells a similar story. No business model deserves your capital unless it demonstrates a path to profitability. Despite intriguing products, Mullen fails this basic financial test at present. I cannot in good conscience recommend buying or owning this stock until underlying fundamentals markedly improve. Instead of putting your capital to work in this EV stock, I suggest searching for companies with stronger financial footing today.
EV Stocks to Buy: Li Auto (LI)
Shifting the focus to Chinese electric vehicle manufacturers, Li Auto (NASDAQ:LI) stands out as a startup embracing its next phase of growth – delivering vehicles, expanding offerings, and improving on its already very profitable business model. While volatility persists across the EV sector, Li Auto has established itself as a relative bastion of stability this year. Trading 34% off its August 2023 peak near $46 per share, I believe Li Auto offers a compelling risk-reward profile for investors at its present valuation.
Impressive Q4 financial results and strong projected growth showcase Li Auto’s operational excellence relative to competitors. The company delivered more than 31,165 vehicles in January 2024 – a 106% increase year-over-year. Moreover, robust Q3 financials demonstrate marked improvements across key metrics, with the company reaching $4.7 billion in quarterly revenues. Showcasing its financial health, Li Auto holds over $10 billion in cash to fund growth initiatives.
Unlike many US-based counterparts, Li Auto also remains highly profitable. Analysts forecast the company’s earnings per share to more than double from 2023-2025, driving the stock’s forward price-earnings ratio down to just 12-times based on 2025 EPS estimates. Combined with a price-to-sales ratio of just 1.1-time based on 2024 estimates, Li Auto offers substantial upside for shareholders as its financial results reflect the company’s operational excellence.
While China’s dynamic macroeconomic policies inject some uncertainty into the picture, Li Auto seems poised to capture a growing market share as the government promotes EV adoption domestically.
Nio (NIO)
Closing out my EV startup shuffle, we arrive at NIO (NYSE:NIO) – one of China’s highest-profile electric vehicle manufacturers on the global stage behind industry leader Tesla (NASDAQ:TSLA). NIO stock has endured substantial volatility over the past year as part of the broader correction in high-growth stocks. However, the company’s fundamentals position Nio for leadership as the market stabilizes.
Initially focusing exclusively on the ultra-luxury segment, Nio has since delivered over 50,045 vehicles in Q4 and now sets its sights on mass-market entry via sub-brands targeting lower price points.
Now, Nio is not yet profitable, and investors anticipate another two years of negative earnings as operations scale. However, with over $5.3 billion in cash on hand, the company’s balance sheet can weather short-term losses. Nio’s growth runway remains robust, justifying a higher multiple than NIO stock’s current 1.4-times price-to-sales multiple. As Nio expands its production capabilities in conjunction with elevated demand forecasts, I think this is a stock that could soar.
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On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
