Electric vehicle (EV) stocks were one of the best-performing asset classes for much of 2020 and the start of 2021. The major factors driving this trend were improving EV technology and public subsidies all over the world. The improvements in EV powertrains have exceeded all forecasts and seem to be progressing at a similar rate to other technologies like semiconductors which have seen constant improvements and falling costs.
Similarly, battery technology continually improves although at a slower pace. But, it's likely that the costs will decline as production increases. As a result, many believe that EVs could be superior to internal combustion engines (ICE) within the next couple of years - without any subsidies - in terms of range, power, and cost.
Bull Market
In 2021, it's expected that around 3.6 million vehicles will be sold globally out of 80 million. Analysts are predicting that this figure will reach 25 million by the end of the decade. Of course, this type of growth is manna for investors.
So, it's not surprising that the KraneShares EV and Mobility ETF
Bear Market
While the fundamentals of the EV story are intact, the market clearly got ahead of itself. For one, nearly every EV company had an inflated value that could only be justified by projecting sales that didn't make sense on a cumulative basis. Second, it also seemed to bypass the fact that legacy automakers would also win market share. Further, companies would likely be engaged in aggressive price wars to win market share which could impact profitability.
Another risk is that autonomous driving technology continues to improve. This development could significantly reduce demand for cars.
So, it's not surprising that KARS dropped by more than 20% from its February high. The biggest losers were the most speculative stocks. Another factor is that prospects for a Green New Deal seem very low given that centrist Democrats are resisting more aggressive pieces of legislation.
Ultimately, this is a healthy development that's good for the longevity of the bull market and the EV industry. These sell-offs are also opportunities for investors to add shares at a discount. However, it's certainly true that some portion of EV stocks certainly peaked in February, while higher-quality ones will go on to make new highs.