IBIS World predicts the automobile industry will drive more than $2.7 trillion in revenue for sector participants in 2021 alone. This massive industry means constant opportunities within this sector of the stock market.
While the coronavirus pandemic led to fears that the auto market would struggle, sending stock prices in the sector tumbling, nearly every stock in the sector has recovered and is now trading at or above pre-pandemic levels.
The bottom line is that in today’s world, transportation is a must, and a bicycle isn’t going to cut it. There’s demand for vehicles even in the face of a public health crisis. So, the fact that investors want to dive into the industry is a given.
Best Automotive Stocks to Buy
While the automotive industry is booming, not all stocks in the sector are created equal. Of course, there are legacy auto manufacturers like General Motors and Ford that act as strong, steady plays, and there are up-and-comers like Xpeng that offer incredible growth potential.
Then again, there are the very small companies with little more than a hope and a dream that are often sold to investors who end up losing their shirts. Of course, you don’t want to be one of those investors.
With so many auto stocks on the market to choose from, where do you start? You’ll find some of the top stocks in the sector below. These are great options to start diving into as you decide which stocks in the industry are worth your investment dollars.
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1. General Motors Company (NYSE: GM)
Legacy Automobile Manufacturer With a Long History of Innovation and Growth
General Motors, or simply GM, is a household name in the United States and a well known vehicle manufacturer around the world. It’s also one of the largest automakers in the world, boasting a market cap of nearly $70 billion.
Naturally, a leader in an industry is likely to be one of the best stocks to invest in. However, the simple fact that the company is a leader isn’t the sole reason for considering an investment. After all, leaders fall out of place all the time. That said, GM doesn’t appear to be going anywhere anytime soon.
Not only is the company one of the longest-standing car makers in the U.S., it’s constantly innovating, looking for new ways to provide more value to the consumers that drive their vehicles.
This innovation is more important today than it has ever been in the past, as the global auto industry is going through an evolution. Concerns about the climate and greenhouse gas emissions are leading to big changes.
Because the transportation sector accounts for a massive portion of the greenhouse gas emissions generated in developed nations, there’s a major push to go green, leading to the development of electric vehicles (EVs) and other technologies like fuel cell power generation to meet humanity’s transportation needs in a cleaner way.
GM knows this change is happening and has no plans of being left in the Stone Age. It has already rolled out multiple EVs and announced plans to go all electric by the year 2035.
As such, not only is the company a leader in its industry today, it’s poised to hold its spot as one of the top dogs for the foreseeable future.
General Motors’ Most Recent Financial Results
GM is known for producing compelling results in terms of both revenue and earnings. The company beat revenue expectations in three of the past four earnings reports. Moreover, it beat analysts expectations in terms of earnings in all four of these quarters.
In the second quarter, the company beat expectations on both earnings and revenue. Revenue came in $34.17 billion, topping revenue generated in the same quarter last year by more than 103%. Earnings was just as impressive, coming in at $1.90 per share and representing year-over-year growth of more than 474%.
GM also produced solid results in net operating margin, operating income, and cost of revenue.
2. Tesla Inc (NASDAQ: TSLA)
A Pioneer in Electric Vehicles; Offers Significant Growth for Investors
Founded in 2003 by Elon Musk, Tesla is a pioneer in the EV space and has become a household name as of late — both among the general public and the investing public. Tesla stock is one of the most impressive growth stocks on the market, yielding more than 100% returns over the past year.
Many argue that the past performance of the stock is peanuts compared to what the company has the potential to do in the future.
Tesla combines state-of-the-art technology with sleek vehicles that are appealing to the eye. However, simply offering EVs isn’t enough these days, as both newcomers and legacy companies are jumping into the EV space.
The way Tesla stays ahead of the crowd is by focusing on innovation, bringing the latest and greatest in technology to consumers with each vehicle they launch. The company is the leading contender in the race to put the first mass-produced autonomous vehicles on the road.
At the moment, every car that comes off the manufacturing line at the company comes with some sort of driver-assisted function, whether that be hitting the brakes for you when you get too close to an object, adjusting the vehicle’s position when you get too close to the edge of the road, or parallel parking itself.
All Tesla vehicles come with these basic autopilot functions, and it recently launched a subscription service that unlocks even more functionality for drivers for $199 per month. Through this service, owners of the company’s vehicles are able to unlock full self-driving features.
Although Tesla says an attentive driver is still required and should always be prepared to take over the wheel at this stage of the technology’s rollout, it is the first company that has made it possible to take your hands off the wheel and foot off the gas, providing a more enjoyable ride.
However, there is one big argument many investors have against the stock. Ultimately, the company’s valuation metrics are concerning. With a price-to-earnings ratio (P/E ratio) sitting at well over 300, many believe the stock is too pricey.
This high price P/E ratio, however, may simply reflect Tesla’s heavy investment in infrastructure cutting into its profits. EVs and autonomous vehicles are still very new technologies, and in order to stay ahead of the competition, the companies involved in these products have to spend massive amounts of money on infrastructure, research and development.
All told, Tesla may be setting the stage for leadership in the long run — a much more valuable proposition than a few dollars in added profits today.
Tesla’s Most Recent Financial Results
Tesla is known for producing incredibly positive results when earnings season rolls around. It beat revenue expectations in each of the past four quarters, and it beat earnings expectations in three out of the four.
In the most recent quarter, revenue came in at $11.96 billion, representing year-over-year growth of more than 98%. Earnings were even more impressive at $1.02 per share, representing a jaw-dropping 920% year-over-year growth.
The company also nearly doubled its cash on hand, quadrupled its operating income, and generated more than 455% growth in profit margins, further pointing to the idea that the high P/E ratio is more than justified on the stock.
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3. Ford Motor Company (NYSE: F)
Innovating Automobiles For More Than a Century
Founded in 1903, Ford is a staple in the auto industry and a household name around the world. As with GM, Ford has grown to epic proportions over the past century-plus, building a market capitalization of more than $50 billion. The company has maintained an innovative drive throughout its life that will likely continue to be the force behind its future growth.
Like GM, Ford has no intentions of being left in the dust in the EV space either. The company also plans to shift its focus from combustion engines to all electric engines, a process that has already started. Ford already has three electric vehicles on manufacturing lines:
- Mustang Mach-E. The Mustang is Ford’s iconic vehicle. One of the most popular muscle cars to ever hit the market, Ford has sold more than 10 million Mustangs since it created the vehicle. It only makes sense that the company would begin its shift to electric engines by launching an electric Mustang — the Mustang Mach-E. The new Mustang takes less than half a second to reach full acceleration while avoiding the costs of gasoline and maintenance associated with combustion engines.
- F-150 Lightning. The F-150 is another iconic model for the company and one of the most popular trucks in the world. Ford averages nearly 1 million sales of the truck per year. So, it’s no surprise that it has added an electric version, the F-150 Lightning, to its lineup.
- E-Transit. Ford also offers a commercial van known as the E-Transit, an all-electric workhorse designed to meet all the needs of businesses, offering incredible storage capacity and longevity consistent with the company’s “Built Ford Tough” motto.
Ford’s Most Recent Financial Results
Ford is another company known for producing stellar results in earnings season, beating earnings expectations in the past four quarters and revenue expectations in three of the four.
In the most recent quarter, the company beat analyst projections on both figures, with revenue climbing more than 38% to $26.75 billion. Earnings came in at $0.14 per share, which was a decline year-over-year, but the reduction was expected due to a global semiconductor shortage that has led to reductions in manufacturing capacity for Ford and other automakers.
4. Nio Inc (NYSE: NIO)
Chinese Electric Vehicle Maker Looking to Expand its Operations Around the World
Nio is an EV company based in China that comes with significant potential for investors. At the moment, the Chinese economy is emerging quickly, and vehicle ownership is becoming a necessity rather than a status symbol.
As a result, the auto industry in China is booming, and with the country’s government focusing substantial efforts on reducing its carbon footprint, it only makes sense that EVs in the region are a hot commodity.
Nio has grown quickly to become a leader in a region where demand is skyrocketing and likely to continue on that path. Although the company is based in China, with the vast majority of its revenue coming from sales in the region, it’s quickly expanding in both the domestic market and internationally. In fact, the company recently announced that it has shipped its first vehicles to Norway, its first step toward penetrating the European market.
However, bearish investors often point to concerns about profitability, of which the company has none. But this may not be cause for concern. The company is building itself up as a leader in an emerging industry within an emerging economy. As a result, the focus right now isn’t necessarily on making money, it’s on spending it.
In any emerging market, those who work hard to become dominant early on tend to become the leaders in the long run, and that’s exactly what Nio is doing. Ultimately, it’s not making any profits because it is spending massive amounts of money on building out its infrastructure to meet the strong demand in the region.
However, that infrastructure buildout only needs to happen once. Soon, the company will be producing vehicles on a massive scale and enjoying significant profits as a result.
Nio’s Most Recent Financial Results
Nio is another company known for producing compelling results during earnings season. In three of the past four quarters, the company has beat analyst expectations.
During the most recent quarter, revenue climbed more than 127% year over year to $8.45 billion, with its net losses shrinking by more than 45% to $659.28 million. The company has also done wonders in terms of improving its net profit margin and increasing its cash on hand.
5. Honda Motor Co Ltd (NYSE: HMC)
Among the Oldest Auto Manufacturers in Japan With a Growing Electric Vehicle Lineup
Honda is another household name here in the United States, but it’s actually one of the leading Japanese vehicle manufacturers. Founded in 1948, the company is one of the longest-lived car makers in Japan and a staple in the global automobile industry.
Not only is the company known for its cars and trucks, it’s a preferred choice among outdoor hobbyists with its top-of-the-line all-terrain vehicles, dirt bikes, and motorcycles.
Moreover, Honda is also making big moves in the push towards electric vehicles. The company commits to shifting two-thirds of its vehicles to zero-emission vehicles by no later than 2030. The company is already working toward this goal, producing a range of electric passenger vehicles, with the newest coming off the line known as the Honda e.
Honda’s claim to fame with its EVs is their charging speeds. Some competing vehicles take hours to fully charge, but the Honda e has fast-charging technology capable of charging the car’s batteries from empty to 80% full in half an hour.
As the company continues to innovate in the EV space, it’s likely to maintain its position as a leader in the global automobile market.
Honda is a great play for value investors, with fundamental metrics that are unmatched by most other vehicle developers. The stock currently trades with a P/E ratio of just 5.97 and has averaged 10.46 over the past five years, suggesting that the stock is significantly undervalued.
Honda’s Most Recent Financial Results
Honda is known for smashing analyst expectations, which it has done in all of the past four quarters. In the most recent quarter, the company produced earnings of $1.31 per share, which represents more than 128% year-over-year growth. Revenue came in at around $33 billion, up more than 65% on a year-over-year basis.
The company also nailed every other metric most investors pay attention to, generating growth in profit margins, cash flow, and operating income.
6. Toyota Motor Corp (NYSE: TM)
Innovation Leader in Hybrid Vehicles With Plans to Expand its EV Lineup
Toyota is yet another legacy auto manufacturer. The Japanese company was founded in 1937 and quickly became a household name in Japan and around the world. In the United States, Toyota vehicles are known for being low-cost, durable alternatives that last just as long as — if not longer than — their higher-cost counterparts.
Toyota isn’t just a massive company, it’s a massive part of the U.S. transportation industry as a whole. It may come as a surprise that in the most recent quarter spanning from April through June 2021, the company sold more vehicles in the U.S. (688,813 in total) than GM.
When it comes to the clean energy movement, Toyota is another company that’s doing its part. It has been offering hybrid vehicles for years and continues to release new, more efficient models.
Toyota has no plans on missing the all-electric boat either. The company is currently working on the bZ4X, an all-electric SUV with a sleek appearance and panoramic roof. While the vehicle is currently in concept phases, the company expects to launch it some time in 2022.
Toyota Motor’s Most Recent Financial Results
Toyota, like many other vehicle manufacturers, has been dealing with issues as a result of the global semiconductor shortage. Unfortunately, this caused revenue to fall 8.8% to 256.7 billion. However, the company was able to effectively offset revenue declines, resulting in net income growth to $21.1 billion in the most recent quarter, up from $19.2 billion in the same quarter in 2020.
Not only did the company beat analyst expectations, it was also able to significantly increase its net profit margin, which climbed by more than 227%.
7. Ferrari Nv (NYSE: RACE)
High-end Cars With High Prices and High Demand Have Generated More Than 2600% Year-over-year Earnings Growth
Ferrari has become a household name as a high-end brand, producing vehicles that are much rarer to see on the road than those produced by GM or Honda. The company and its vehicles are legendary in the sports cars niche.
These vehicles are so legendary that collectors are willing to pay more than $50 million dollars for rare, classic versions of the cars according to Ferrari Lake Forest, an official dealer of the high-end vehicles.
Ferrari is set so far apart from most others in the automobile industry that, while others tumbled as a result of COVID, this stock barely dipped. Ultimately, the company caters to wealthy customers, which offers some support even in the toughest of times.
Although some investors argue that the stock is overpriced — trading with a P/E ratio of around 40 in an industry with an average P/E ratio somewhere between 10 and 20 — others disagree, and for good reasons.
Ferrari has unmatched brand power, which gives it plenty of pricing power. That means the company can — and does — price its vehicles far higher than the average manufacturer. This opens the door to larger profit margins and increased potential for growth.
As a result, the return on capital employed for the company is far higher than what you see with the average automaker. With the auto industry being so capital-intensive, having one of the highest returns on capital in the space is a huge plus.
Not to mention, Ferrari is bringing electric options to the high-end vehicle space. The company recently launched the SF90 Stardale, an electric supercar that’s sure to turn heads with a starting price of $625,000.
As the company continues to innovate and push the limits, both with combustion engine supercars and those powered by electricity, it’s likely to hold onto its spot as a top dog with tremendous brand and pricing power, leading to further growth.
Ferrari’s Most Recent Financial Results
In the most recent quarter, the company blew away all expectations, producing revenue of $1.03 billion, representing more than 81% year-over-year growth. Earnings per share came in at $1.11, representing jaw-dropping growth of 2675%. As you could imagine, both figures beat analyst expectations.
The company also generated significant growth in net income, net profit margin, and operating income, further justifying what some may misconstrue as an overvaluation.
8. XPeng Inc (NYSE: XPEV)
A Fast-growing Chinese Electric Vehicle Manufacturer in the Race to the First Mass-produced Autonomous Vehicle
Founded in 2014, XPeng is a very young company compared to others in its industry, but you can’t discount the incredible success it has had and will likely have in the future. Just eight years after inception, the company is worth more than $36 billion.
XPeng is building to become a major competitor to Tesla in China, and will likely venture into the international market in due time.
The company’s claim to fame is its state-of-the-art technology, which is included in incredibly reasonably priced cars. XPeng is in the race to bring self-driving vehicles to the world using a combination of lidar, radar, and cameras to ensure safety.
The company’s mass-market pricing and approach is working well too. In the first six months of 2021, the company had sold 30,738 vehicles. For a relatively young company with limited production capacity, that’s an impressive number. However, that limited production capacity isn’t likely to last long.
One of the big concerns investors have about the company is its lack of profitability. The company is young and growing quickly, however — to do so, it needs to spend massive amounts of money on technology, infrastructure, and marketing. So, it makes sense that the company isn’t profitable at this stage.
The fact that the company is spending so much on growth and innovation may actually be a positive in the long run, making XPeng one to watch closely.
XPeng’s Most Recent Financial Results
The last earnings report released by the company proved to be overwhelmingly positive, beating analyst expectations in terms of both revenue and earnings. During the quarter, the company generated $3.76 billion in revenue, representing year-over-year growth of more than 536%. Loss per share shunk more than 76% to $1.5.
The company also significantly increased its cash on hand while reducing its overall cost of goods.
9. Volkswagen (OTCMKTS: VWAGY)
A Household Name With Plans to Transition to All-electric Vehicles Within the Next Decade
In the United States, Volkswagen trades on the over-the-counter (OTC) market, which is usually a big red flag to investors to stay away. Most OTC companies are penny stocks in the very early stages of business, some of which don’t even have a product on the market yet.
But that’s not Volkswagen. The company was founded in 1943 and has plenty of products on the market. The company’s brand has become a household name in the U.S. and around the world, and its iconic Volkswagen Beetle is the subject of a perennial road trip game that induces a friendly punch in the arm every time one drives by.
Ultimately, Volkswagen trades on the OTC market because it’s a foreign company that’s able to drive significant investor interest at home in Germany without listing on a major stock exchange in the United States. That doesn’t make it a bad investment.
One of the big draws to the stock is how quickly it plans to transition to all-electric vehicles. In Europe, it intends to make all its vehicles run on electricity rather than fossil fuels by no later than 2033, a full two years ahead of GM.
The company is taking that plan seriously, expecting to surpass the number of EVs sold by Tesla by 2025. To do so, the company is investing massive amounts of money into reducing the cost of batteries, one of the most expensive components of EVs. It also has plans to build six massive factories in Europe by 2030, where it will produce its EVs on an incredible scale.
Not to mention, Volkswagen already has EVs rolling off the assembly line and onto sales lots in the United States, Europe, and Asia.
At the end of the day, Volkswagen is an iconic brand that has all intentions of being a driving force in the automotive industry as it shifts from fossil fuels to clean energy. That makes the stock an attractive play for investors.
Volkswagen’s Most Recent Financial Results
The company’s second quarter performance wasn’t just impressive, it beat analyst expectations, smashed records, and led the company to increase its guidance. Revenue for the quarter came in at 67.29 billion euros (about $78.9 billion), up from 41.08 billion euros ($48.2 billion) in the same quarter last year. The company also posted operating profits of 11.4 billion euros ($13.4 billion), making it the most profitable quarter in the company’s history.
As a result of the strong performance, the company said that it now expects operating returns on investment in 2021 to come in between 6% and 7.5%; this was slightly higher than the company’s previous projection of between 5.5% and 7%.
Also Consider Automobile ETFs
If you’d like to start investing in the automotive industry, but you’re either not comfortable with doing the research required to make wise investment decisions, or simply don’t have the time, there’s another option: exchange-traded funds (ETFs).
These funds pool money from a large group of investors to invest based on the strategy outlined in the fund’s prospectus. These days, ETFs are some of the most commonly traded assets, offering access to just about any industry and investing style you can imagine.
There are some significant benefits to choosing to invest in an automotive fund rather than individual stocks:
- Diversification. Investment-grade funds are highly diversified investments. That heavy diversification offers protection against volatility in any single asset in the portfolio. For example, if GM stock were to report poor financial results, the stock would fall. However, in a diversified fund, holdings in other stocks would offset the declines in GM.
- Management. ETFs are managed by some of the best professional investors and traders on Wall Street. When making investments in them, you can rest assured that your money is being invested wisely.
- Cost. ETFs come with expense ratios but are generally very low cost, saving investors quite a bit of money compared to trading each stock individually.
These are some of the best auto stocks on the market today, but it’s important to remember that this list is only one expert’s opinion. It’s never a good idea to blindly follow anyone in the stock market.
The most successful investments are those that are made after thorough research into exactly what you’re buying. If you do your research and make the right picks in the sector, the potential gains are hard to ignore.
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.