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- [00:02]
A
Do we have a new winner in the EV market? Molly Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoyam, joined today by Lou Whiteman and Rachel Warren. And before we get started, I actually want to mention that we have the SpaceX IPO coming out later this week and we're going to be covering that on Breakfast News. If you are new not getting that, you can go to news.fool.com get that in your inbox every morning. Big highlight of the SpaceX coming out Thursday morning. But now onto our regularly scheduled topic. That is electric vehicles. Guys, we don't talk about electric vehicles nearly as much as we did a couple of years ago. A lot of different changes in the market from incentives to the amount of competition in the market. But we did get some news yesterday. Rivian is actually starting to sell the R2. So I wanted to kind of dive into what's going on in this EV market because this is where there potentially could be some hidden gems for investors because some of these stocks are pretty beaten up from their all time highs. Rachel, does the EV market still have growth after some of these tax changes and what's sort of the competitive dynamics there? Because I want to get kind of an overview of what's going on. This is no longer just a Tesla centric market anymore.
- [01:23]
B
Yeah, that's very much the case. And it's interesting some of these dynamics as we've seen a shift in consumers leading towards used versus new EVs and I'll dive into that a bit. I think the shift from the federal incentive structure has had more of maybe a trickle down effect than some would have thought. I mean this idea of transitioning from a one time point of sale credit to a multi year loan interest deduction, obviously it applies to multiplicity of vehicles, not just EVs. But we're going to focus on the EV market here. You've got a $10,000 annual tax deduction on on American made auto loan interest. And so it offers long term savings for certain brackets. But obviously you also as a buyer you have to have the upfront capital or credit to absorb that initial purchase price. And so when the federal government ended the $7,500 point of sale credit for new EVs, obviously this created a dynamic where these cars became a lot more expensive for a lot of average consumers. Now what's been really interesting to look at is how we're seeing growth in the used EV market. Obviously these are vehicles that will already absorbed that massive first year Depreciation that we tend to see. There's a, you know, upfront discount built into the sticker price. And for manufacturers, it's created a bit of a bifurcated market. You've got kind of tech forward or premium brands that can leverage these shifts. But a lot of the legacy manufacturers are maybe going to be struggling to lower some of their retail prices fast enough to keep pace. One final thing I'll note. You know, early adopter EVs leased or bought in recent years are now hitting the used market in massive numbers. And that means that secondary market supply supply is very high. And in some cases it could drive used EV prices down to near parity with traditional gas cars if we look ahead the next five years or so. And I also think as these early generation EVs, they lease out, they flood the secondary market. There's a question, could this cannibalize new car demand that we will have to see?
- [03:16]
A
Yeah, Lou, it's really interesting to see the competitive dynamics in this space. And you know, we've been looking at the industrials and the auto industry for a very long time, but if you just look at the number of new EVs sold, it seems like the, the, the tax credit ending did impact sales starting in the fourth quarter. As you would naturally think of 2025 when that rolled off 216,000 units. According to Cox Automotive, that's down from about three or four years ago. And the numbers are essentially flat over that period of time. So there has not been this huge adoption curve at the same time. And I think this is what's really interesting as we look at this from an investment perspective. I just pulled the number of electric vehicles in the SUV category and there's now with the R2, that puts us at 20, 20 competitors in the market. Five years ago there was essentially two. It was either you get a Model Y or a Model 3.
- [04:12]
C
Yeah. I will forever wonder how much of the drop off is due to the tax credit and how much of it is just every. All the early adapters got theirs and it's just not amazing mainstream product yet. But that's sort of what the R2 is trying to solve. In theory, they are trying to become kind of the Subaru of the EV market.
- [04:35]
A
Do you think they can do that? Because looking at the list, I mean the Chevy equinox is about $10,000 less starting point. You have the Ford Mustang Mach E, which is about $5,000 less than that $45,000 starting point. The ID4 from Volkswagen, it isn't like there's nothing out there in this category.
- [04:51]
C
Oh no. And the ix3, I'd even put like some of just the hybrid vehicles from Toyota and Honda right there as sort of real competitors. Rachel mentioned there's no advantage in that interest deduction, credit for EVs now. So there's nothing that really makes them special. Can they do it? So they are trying to offer this idea that you get a more premium feature loaded soft road product. And again, I would say arguably BMW and Volvo and some of these might say hello, we're here. To me though, I don't really, I mean we have to care about market share because they need to generate cash from these. But they designed the R2 in such a way where the bill of materials basically, which is a way of like how much it costs to actually make it or like the stuff that goes into it, is about half of what the R1s was. They need this to be a margin driver much more than they need it to be just kind of taking over the world or becoming the new Toyota Corolla. I, you know, there's a niche there. They can do it. But I mean, even then I'm not sure because unfortunately they want to position this as a, if not luxury, at least a more quality product at about half of the expense of, you know, they took a lot out of it to get there. So I think they're in a tough place. But I do think there is a window of a market there. I don't think we should really focus on like just volume here. We need to focus on can they do this profitably and actually move some
- [06:27]
A
of these things to, to that point. One of the things that I think is really hard to look at with a company like Rivian and the launch of the R2 is, I think it is an attractive vehicle. It, it has a niche in the market, but it is a niche and that niche is filled by a lot of vehicles. If you look, if you're looking in that, let's say 40 to $50,000 price range for an SUV that can sit seat four or five people, you're not just looking at Rivian. You have Jeep, you have a bunch of offerings from, you know, Chevy, Ford, the big US Automakers, some of the international automakers. Is there enough of a market there to be a niche player that can have the volume that can ultimately drive to profitability? I mean, that's, you know, we're investors. Fundamentally, that is the question is you, you can't have a plan that can make 400,000 vehicles which they need to build this Georgia plant and then have it sitting idle. The economics just don't work.
- [07:27]
C
Yeah, and again, I think it's a very narrow road to this all working out. I do think they're pursuing a path, but the market we're in, you want to have diversity of product, just kind of for revenue. I mean, to put all of your chips in one basket, so to speak. Just the nature of this business. I don't know if there is just a product that can make this work. I think the R2 was a decent attempt at it. But yeah, as investors, I am more cautious or more gun shy here than I am bullish or excited about this. They always had a tough challenge. I think with Elon we've forgotten the fact that most automakers, it doesn't work out for Tesla is the exception to the rule, not the rule. So I don't think we're saying anything we don't know about Rivian. But just because the R2 is out there, it's not just slam dunk success.
- [08:23]
A
The other thing to note with Tesla's economics is if you look throughout their history, the high margins that they eventually got to happened during the pandemic when there was a lot of demand for vehicles and there wasn't enough supply for vehicles. Tesla was one of the companies that kept producing vehicles. They had. They didn't make the same chip mistakes that a lot of the legacy automakers did. So they actually raised their prices during the pandemic. Coincidentally, those margins went up at the same time as we've gotten back to more of a normal state of supply for the industry. Tesla's margin is actually not any better than any of the other legacy automakers. So we'll see where Rivian can come out there. The one thing that they would like to point out, and we'll see if this is going to be something in the future, is software that they're selling. So we're going to talk about how Autonomy could potentially be a tailwind for Rivian and other automakers Next. You're listening to Motley Fool. Hidden Gems Investing
- [09:20]
D
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- [09:52]
A
Hidden Gems Investing. If we're going to talk about electric vehicles, we need to talk about Autonomy as well. This is the service. The software is a service that a lot of these companies are selling. Tesla started this. Rivian has launched their Autonomy products, planning to be fully autonomous. Level four, I believe it would be, not level five in 2028, but again, more and more competition coming into the market. I mentioned Rivian Lucid also has a deal with Neuro and Uber. So Lou, is this the kind of thing that could be a growth avenue for EV companies specifically to kind of differentiate themselves in a different way from the legacy automakers? Or are they just talking about this a little bit differently than everybody else?
- [10:35]
C
Yeah, no, this is not gonna be the answer here. And I'm sorry. Cause I'm.
- [10:39]
A
You're not excited to pay $100 a month not to drive your vehicle that's supposed to be fun to drive?
- [10:44]
C
Well, I mean, yeah, there's a point to that. But look, I'm not a car guy for one thing. I mean, vehicles are utilities. They are to get me from point A to point B. So I'm not the one to ask here. But look, first of all, you have to convince me that Rivian and Lucid and all of these companies can really come to market at the timetable they're hoping for. Tesla and even Way have shown that this is a very, very hard problem to solve. So I am going to take the over on all of the timetables. Secondly, you have to explain to me how these products can still provide a competitive advantage, a differentiator in a moment where Detroit is not standing still and Detroit is coming out with their own products as well. There is a long tradition here that goes back to the lowly windshield wiper technology innovation. All of these things come out. It's a premium thing for a moment and then it becomes commoditized. Today's premium upgrades are tomorrow's standard features. That's what most likely comes out of this. That's how the trend continues. I'm not saying they shouldn't invest in here, but the difficulty is this is not going to be premium. This is going to be table stakes. If not autonomous, at least driver assist. Everybody is there. The Hyundai bought has all of these tools for free that you can basically, you shouldn't, but you can basically self drive on the highway. You can do that right now for free with the Honda. Explain to me how in five years this is going to be a premium source of revenue for some, some other company.
- [12:15]
A
Okay, Lou, I want to, I want to push you on some of the things that have been premium in the past and then have become standard because I think you and I are both old enough that we can, we can play the old man shouting at clouds characters here where automatic windows were not standard when I was a kid. Airbags used to be a premium feature. Hope you want to buy this vehicle because it has airbags, whereas this other one doesn't. So are those a couple more examples of the things that you're talking about that these are premium until everybody has them?
- [12:48]
C
I mean, leather seats, even, you know, look, and we're seeing it today, adaptive cruise control. There are still. When I was shopping for, there was one automaker, not one of these, that still you had to pay a package, not a subscription fee, but a package for adaptive cruise control. I looked at six different vehicles. The other five of them, it was free, it was standard. That package is not going to last. There's just so long of a history here. If everybody would collude with each other and agree to never give this away, but this is a highly competitive, low margin industry, and if you're putting all of that money into it, you try to take advantage in near term, that just always leads to commoditization. And that's where we're headed with this, too. I have no doubt about this.
- [13:34]
A
All right, Rachel, is autonomy something where a company like Rivian can differentiate itself, or is Lou right that this is just going to be the next windshield wiper, the next, you know, power windows that we look back and, you know, my kids, once they start driving, go, wait a second, you used to have to actually drive your vehicle?
- [13:53]
B
You know, I don't think it's going to necessarily be a differentiator. And I'll explain why. I have a little bit of a different take than Lou. But I also don't think it's going to become so commoditized that at least not five to 10 years from now, this is just the norm in every vehicle. But kind of going back to that idea of, you know, autonomous software being the thing that drives revenue for, that expands margins for these unprofitable cash burning companies, I think that is a very difficult hill to climb. I mean, you first you have to think about the technology itself there it faces what I would say is sort of the severe 99% problem, meaning the software can handle Standard highway driving. But mastering that final 1% of the chaotic, unpredictable urban edge cases, it requires a computing power and software sophistication that a lot of these pure play EV startups or other automakers are burning billions trying to solve without having a guaranteed timeline. There's also the capital destruction that goes back to hardware redundancy.
- [14:51]
A
Right?
- [14:51]
B
I mean, if you're looking at integrating expensive lidar, dual super chip processors, redundant braking and steering systems into these mass market vehicles, that is a really significant weight on corporate profitability. And that also trickles down to the consumer at a time when a lot of consumers are demanding more price accessible cars. And then finally, the other note I'll make, we were seeing these commercial fleet partnerships with the likes of Uber, but it's not a silver bullet. There's still a really crushing operational burden that a lot of these automakers are going to have. There's the wear and tear and rapid depreciation of these high utilization commercial vehicles. One final thing I'll note. You think about how standard cars are designed for a consumer who maybe drives 12,000 or more miles a year, but a commercial robotaxis often running, you know, constantly in dense city centers, there's really accelerated mechanical wear and tear. So there's a lot of really practical realities that even if you see this software becoming the go to for these automakers, I don't think it offsets the costs that they're going to be experiencing elsewhere. And that's where when you have a really unprofitable company burning cash, I think they're already facing an uphill battle.
- [15:59]
A
The analogy here may just be the edv, the delivery vehicle that was supposed to be, you know, 100,000 units of demand from Amazon. I actually see these around every once in a while. They're huge. I'm sure they're, they're great and they're efficient and they seem like they hold a lot of boxes. But it has not been a huge sales driver for Rivian. So sometimes these, you know, hey, this is going to be our silver bullet just doesn't quite materialize. All right, I think we have plenty of questions about what the future of some of these EV companies are, especially Rivian in the economics. But when we come back, I want some hidden gem stock ideas because there are some opportunities out there. We'll get to that in a moment. You're listening to Motley Fool. Hidden gems Investing.
- [16:44]
E
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- [18:09]
A
Hidden gems Investing guys, as you look at the EV market, are there any hidden gems? Lou, I'm going to have you go first.
- [18:18]
C
All right. So the one I'm really still watching is Quantumscape, which is ticker Qs and this is solid state batteries. They are the breakthrough that need to happen that to get me off the fence to get me to buy an ev. Explain.
- [18:31]
A
So why is solid state important?
- [18:32]
C
Yeah. So Quantumscape and they're not the only ones doing this but on paper this is. Well basically it is a more stable battery period. Lithium ion batteries are not stable. Some of these we're just not using great designs. Now we're using the designs we have to use with a more stable battery. A you can pack more into it so you don't have to charge as often but also you can charge it a lot faster. So the charging time would be about a gas station visit. So it would basically be what we're all used to and as consumers who would just give us what we want. These are really cool. They've been around forever. The hard part and it's Taken decades to even get close to. This is mass producing them. It is really, really hard to make them at scale. For automakers or others. Quantumscape is slowly getting there. They have great partners like Volkswagen. It seems to be on the path again. There's others here too, so there's a lot of risk. But if and when they get here, that's when the EV revolution is really going to happen. We've been kind of, it's amazing the numbers we've sold given the lack of technology we have here to solve problems. But it would solve so many issues from just the ability to pack them, the number of batteries needed, some of the heat concerns and a lot of that. It is just a better chemistry if you can do it at scale.
- [19:53]
B
Rachel yeah, the company on my watch list is NXP Semiconductors ticker nxpi. So they essentially dominate the automotive processing and battery management systems market. And their proprietary microcontrollers, these are mission critical components, monitor things like cell voltage, they optimize thermal management, calculates real time range accuracy. So this means that a lot of major global automakers require their hardware to prevent issues like battery degradation or you know, catastrop overheating. And they have a really structural moat in radar processors, secure vehicle to everything, communication chips. So I think that if you're looking at the growth in advanced driver assistance systems and you're looking for a potential direct beneficiary of that, you know, a profitable diversified hardware play like NXP Semiconductors could be an interesting one to take a look at.
- [20:48]
A
I'm going to play a little bit here too as well. Do you guys know the number two EV manufacturer in the US General Motors. General Motors. Guess what? General Motors stock over the past three years up 124%. That beats Rivian Tesla Lucid, which is down 92%. So you know, take that with a grain of salt and Quantumscape and the stock is still trading for just six times forward earnings estimates. So sometimes the obvious answer, which is the legacy companies are going to be just fine is the hidden answer. So it doesn't sound like a hidden gem, but I think if you're interested in EVs, take a look at GM. As always, people on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for Lou Whiteman, Rachel Warren and Dan Boyd. Behind the glass, I'm Travis. William. Thanks for listening. We'll see you here tomorrow.