An EV Boom ‘Picks and Shovels’ Play

Electric Cars, Energy Investing

The global electric vehicle market is projected to grow from just $287 billion in 2021 to a massive $1.31 trillion in 2028, forecasts Sustainalytics, a leading independent ESG and corporate governance research and analytics firm.

That nearly one-and-a-third trillion-dollar market is an opportunity few investors will want to miss.

However, many investors looking to hitch a ride on the electric vehicle boom think of only one company—Elon Musk’s Tesla (TSLA).

That focus may be a mistake… there are better, and safer, ways to get in on the EV boom than the wild ride Tesla shareholders have had to endure over the past year.

Let me show you…

Other Ways to Play the EV Boom

For example, one top rival has seen its stock fall by far less than Tesla’s 64% plunge in 2022. Hong Kong-listed BYD (BYDDY) was down by only 15% in 2022. Warren Buffett is still a shareholder and—if hybrid vehicles are counted—it is the world’s largest seller of EVs in 2022. BYD totaled 1.86 million in sales—the vast majority of which were made in China—and well ahead of Tesla’s total of 1.3 million overall sales.

But, as with the California gold rush, the obvious plays may not be the best route to profits. The reality is that the shift to electric cars is transforming the automotive industry, with automakers giving ground in terms of purchasing power to suppliers, including battery makers, mining companies and semiconductor firms.

One example of a company that I’m thinking about is Chile’s Sociedad Quimica y Minera de Chile (SQM). Its stock has risen over 68% the past 52 weeks, thanks to the 10-fold increase in the past two years of battery-grade lithium chemical prices to $75,000 a ton, according to S&P Global Commodity Insight.

Another company investors usually do not associate with electric vehicles is a manufacturer of semiconductors for EVs, Analog Devices (ADI), one of the world’s biggest analog chipmakers. Analog chips convert real-world signals, such as sound, temperature, and pressure, into digital signals that can be processed.

Let’s now take a closer look at Analog.

A promising investment

Analog Device’s key markets include: industrial (about 51% of sales in fiscal year 2022.); automotive (21%); communications (16%); and consumer (12%). Its customer base is fairly broad, with no one customer accounting for more than 10% of its revenue base.

Here is what the investment research firm CFRA says about Analog Devices:

ADI is benefiting from improving demand across the industrial and automotive markets (combined 71% of sales), with the most traction from higher semiconductor content areas like automation, instrumentation, and energy as well as for its battery management systems inside electric vehicles. Also, ADI should benefit from 5G adoption and demand for optical connectivity products from wireless carriers/data center providers.

In its last quarterly report (November 22), the real bright spot for Analog Devices was its automotive semiconductor sales. ADI’s revenue were up 28% year over year on a pro-forma basis, with automotive chip sales up 49% year over year thanks to strong positions in premium and electric vehicles.

Industrial sales were also strong, up 40% year over year. Management cited strength in digital healthcare applications.

With regard to the automotive industry, here is how Morningstar described the company’s strong position:

An especially promising end market for the firm continues to be the automotive sector. Semis are required to enable the sensors, active safety systems, and advanced infotainment systems added to cars today. Electric vehicles have even more chip content per car, and ADI is well positioned, with a market share lead in battery management systems for electric vehicles. 

Morningstar was also impressed with its industrial business: “We’re also seeing a similar trend of

increased chip content in industrial applications like robots, factory equipment, and medical devices.

ADI has tens of thousands of customers in these end markets. Further, ADI’s signal chain semiconductors continue to be prominent in 5G wireless network equipment.”

Why ADI is a Buy

Even though we currently face a lot of uncertainty right now with regard to the global economic situation, the energy transition is not going away, and electrification of vehicles is going to ramp up.

Analog Devices has outperformed most other technology stocks. In 2022, it was down only about 8.5%; over the past 52 weeks, it is now up about 11%.

Thanks to its position of strength in the automotive and industrial markets, analog chipmaker ADI is a buy in the low-160s to low-180s range.

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