The auto industry typically isn’t the first place most investors look for the next best stock. The industry’s cyclical and capital-intensive nature doesn’t lend itself to stratospheric stock returns.
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Even Warren Buffett voiced reservations at this year’s Berkshire Hathaway Inc. (ticker: BRK.A, BRK.B) annual meeting on the challenges of investing in the sector, particularly with electric vehicles, telling shareholders that the auto industry is “too tough… (EVs are) imposing huge capital costs and huge risk — and I don’t like huge capital costs and huge risks.”
Despite the auto industry’s challenges, it has multiple secular tailwinds in its favor, such as the rise of electric vehicles, the explosion of high-margin pickup truck demand and breakthroughs in self-driving technology.
A bright side to the prevailing skepticism is the undervaluation of many auto stocks. This presents a compelling opportunity for value investors to secure potential bargains. Thus, for those considering a stake in the auto market, here are six promising auto stocks worth exploring:
| Stock | YTD return as of Sept. 8 |
| Mobileye Global Inc. (MBLY) | 3.4% |
| Tesla Inc. (TSLA) | 101.7% |
| Ferrari NV (RACE) | 39.7% |
| Rivian Automotive Inc. (RIVN) | 25.3% |
| Ford Motor Co. (F) | 15.1% |
| General Motors Co. (GM) | -1.3% |
Mobileye Global Inc. (MBLY)
The auto industry is rapidly adopting autonomous driving technology, and Mobileye is a pure play on this burgeoning trend.
Mobileye produces the chips vital for advanced features like adaptive cruise control, parking assist and pedestrian detection. And it dominates that market — a staggering 42% of vehicles sold in 2022 boasted Mobileye’s cutting-edge tech, partnered with giants such as Bayerische Motoren Werke AG (BMW.DE), Ford and Honda Motor Co. Ltd. (HMC).
As major automakers pivot towards high-end vehicles, particularly feature-rich pickup trucks, Mobileye’s offerings such as parking assist and night vision become key for automakers looking to differentiate. These aren’t just luxury add-ons; they’re pivotal selling points that can demand premium prices.
Despite its dominant position in what is an exciting investment theme, the stock is only up 3.4% year to date, owing to the firm’s lackluster guidance on revenue growth, which anticipates only 15% year-over-year growth in 2023.
The negative sentiment in MBLY stock this year offers a compelling entry point to gain exposure to the autonomous vehicle market, which is expected to grow significantly for years to come.
Tesla Inc. (TSLA)
Tesla is the poster child of the EV revolution. Going from a market cap of $14 billion in 2019 to over $800 billion today, it has rapidly become a juggernaut in the industry and by far the top-selling EV maker.
The company’s cult-like customer loyalty and nationwide charging network give it a competitive moat in the EV market that brands like Ford, GM and Volkswagen AG (VOWG.DE) have been desperately attempting to chip away at, to no avail.
But, sitting at a market cap north of $860 billion, many think that Tesla’s hypergrowth days are likely in the rearview mirror. And with the stock’s rich price-to-earnings ratio, or P/E, of about 78, it’s vulnerable to a shift in investor sentiment.
Still, the company has a significant growth trajectory as global adoption of EVs is just barely underway and expected to grow rapidly in the coming years. If Tesla can hold onto its dominant market position, the stock is likely still a winner.
And on the horizon is the release of the one-of-a-kind Cybertruck, which the company plans to start delivering at the end of this year, ramping up production in 2024.
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Ferrari NV (RACE)
Ferrari stands alone among automakers, positioning itself more as a luxury lifestyle brand than a mere car company — a Ferrari is a global signal of wealth.
While automakers like Toyota Motor Corp. (TM) and General Motors aim to sell as many cars as possible, Ferrari intentionally sells very few cars. It artificially limits production to nurture exclusivity, which grants it unparalleled pricing power in the auto industry. On top of that, buyers have to earn the right to buy a Ferrari through an approval process; the company makes buyers sell themselves.
This gives the company unparalleled margins in the auto industry, at 18% net profit margins compared with 6% for GM and 2% for Ford. As a result, RACE doesn’t trade like your average car stock and demands a premium valuation, currently sitting at a P/E ratio of 47, while the rest of the industry tends to trade below 10.
These competitive advantages make Ferrari one of the most compelling stocks in the auto industry, and the market agrees. RACE has returned nearly 130% over the last five years, and 39% in 2023 alone.
With the recession protection you get from ultra-luxury products like Ferraris, it stands out as one of the strongest automotive stocks to buy.
Rivian Automotive Inc. (RIVN)
Rivian is a new contender in the electric vehicle market, balancing its strategy between luxury electric trucks and commercial delivery vans. Its flagship models, R1T and R1S, are high-performance luxury trucks designed for the outdoor enthusiast, each starting at over $70,000.
On the commercial end of things, Rivian’s partnership with Amazon.com Inc. (AMZN) promises the delivery of 100,000 electric vans by 2030. According to the company’s recent earnings call, Rivian vans are already rolled out in over 800 cities. Such a partnership is vital for a young growth company to establish a stable source of revenue while it scales the often volatile consumer EV business.
However, the path to profitability is no easy feat for Rivian. The company expects to be gross profitable by the end of 2024, meaning it will likely need to raise additional capital in the future, which can dilute current shareholders. Should the company fail to ramp up production according to its timelines, that could exert even further pressure on share prices.
The silver lining to the scaling troubles is the quality of Rivian’s vehicles. Consumers love the R1T pickup truck, which Car and Driver rated 10/10 and said was “one of the most capable EVs ever,” and several commentators praised the trucks for their range, power and innovative features.
However, in an industry where Elon Musk’s Tesla is flexing its muscles with the Cybertruck, set to ship later this year, Rivian has a tough road ahead. An investment in Rivian today is a high-risk, high-reward proposition.
Ford Motor Co. (F)
Investors have been sour on Ford as of late, with the stock declining over 20% from its July highs. Between labor negotiations going south and market skepticism around the company’s transition to electric vehicles, investors have found a lot to worry about.
As the United Auto Workers’ union edges closer to a potential strike, a cloud of uncertainty hangs over Detroit automakers like Ford. An analysis from Goldman Sachs paints a grim picture, estimating a weekly revenue drain of about $3 billion for Ford should the union strike.
Compounding the negative sentiment is the company’s expanding losses in its electric vehicle segment. Ford’s projections indicate a ballooning $4.5 billion loss for the segment this year, a significant uptick from last year’s $3 billion shortfall. And even as consumer demand is on the rise, Ford still seems to have scaled production too quickly, resulting in a glut at showrooms.
But Ford’s misfortune could be an opportunity for value-minded investors. Trading at a modest 6 times projected 2024 earnings, one can’t help but wonder if the negative sentiment surrounding Ford might be a bit overzealous.
General Motors Co. (GM)
The current story of General Motors shares parallels with its Motor City peer, Ford: labor disputes occurring amidst a troubled transition to electric vehicles. Its stock is down about 19% from July highs.
Echoing concerns across the industry, GM’s global head of manufacturing recently sounded the alarm on the implications of a labor strike, alluding to “significant costs” that could throttle the firm’s production pace. To put things in perspective, Goldman Sachs estimates a labor strike would cost GM roughly $2.5 billion in weekly revenue.
Of course, negative market sentiment isn’t limited to labor disputes. GM’s electric vehicle project, including an ambitious pledge to be fully electric by 2035, just hit a major roadblock with the exit of a key executive, Deborah Wahl, who was in charge of its EV transition.
But there’s an intriguing subplot which can serve as a key catalyst for GM stock: robotaxis. GM’s Cruise division is trialing autonomous taxi rides in cities like San Francisco, Austin and Phoenix, locking horns with Alphabet Inc.’s (GOOG, GOOGL) Waymo. While not without setbacks, the endgame could see GM leapfrogging Tesla in the race to deploy robotaxis.
With GM’s P/E ratio sitting at less than 5 times projected 2024 earnings, the stage might be set for a rebound if the automaker can right the ship.
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Update 09/11/23: This story was previously published at an earlier date and has been updated with new information.
