Electric vehicles have been one of the best-performing sectors in the market. This is evident from the KraneShares Electric Vehicle and Mobility ETF's (NYSE: KARS) 194% gain, while the S&P 500 is up 74% over the same period.
These gains have whetted investors' appetites, and Wall Street has enthusiastically responded to it with a slew of new companies in the space going public via listings or SPACs. And of course, such frothy behavior has created concern that the sector is in a bubble.
Baidu - Geely Team Up
Bulls would argue that EVs are in the early innings of a major trend. By 2050, the IEA expects that more than half of all cars sold will be EVs. Given that more than 80 million cars are sold annually, this means the potential market is massive which creates room for plenty of winners. Further, EVs are expected to be high-margin products given that costs continue to decline especially as economies of scale are unlocked.
And, the bulls' optimism seems to be validated by Apple (Nasdaq: AAPL) announcing its exploring making cars with Hyundai. Now, Baidu (Nasdaq: BIDU) has formed a joint venture with Geely (OTC: GELYF) to produce electric cars as well. These massive companies putting their resources to work on EVs is a signal that this is more than a simple bubble.
Additionally, it should make upstart EV companies nervous, since these companies have deep pockets and are willing to endure losses to gain market share. In Baidu's JV with Geely, it will focus on the design of the cars, self-driving technology, while Geely handles the manufacturing.
This makes sense. Geely owns Volvo, so it has manufacturing facilities all over the world. It would be able to handle the challenges of scaling production while maintaining quality which is something that Baidu has no experience in and would also entail huge fixed costs.
Stock Price Outlook
After its public debut, Baidu was one of the hottest Chinese and Internet stocks as it was dominant in Internet Search and had a similar market share to Google (Nasdaq: GOOG). However, the stock underperformed many Chinese stocks and indices over the past decade. Growth remained solid as revenue went from $1.2 billion to $15 billion on a trailing twelve-month basis.
However, this has changed in recent months. Baidu's interest in EVs has been rumored, and it's also one of the leading autonomous driving companies as well. As a result, Baidu's stock is up 80% over the last six weeks. The combination of EVs and autonomous driving has the potential to create another decade of growth for the stock. Additionally, it has the resources to compete and gain market share.