EV Demand Is Surging. Why Are Suppliers Underperforming?

Our theme of EV Supplier stocks has underperformed this year, declining by about 20% year-to-date, compared to the S&P 500 which is down by about 16% over the same period. The decline comes as investors rotate out of futuristic themes and higher multiple stocks, amid rising interest rates and tighter monetary policy by the U.S. Federal Reserve. That being said, demand for electric vehicles has remained robust, driven by surging gasoline prices (up by around 25% year-to-date) and continued government support. For perspective, sales of plug-in electric vehicles in the U.S. rose by almost 60% year-over-year in Q1 2022 to around 160,000 units, compared to the broader auto market which contracted by about 18% year-over-year due to supply chain constraints.

Now the near-term outlook for EV supplier stocks could be mixed. While we expect EV demand to hold up, there are concerns that the U.S. could be headed for a recession, with Q1 GDP already shrinking year-over-year. Moreover, the Fed is looking at half-point interest rate hikes over June and July as well, and this could further hurt the markets. That being said, the longer-term outlook for the EV supplier theme remains solid in our view. The total light vehicle market stood at about 90 million units in 2019, before the Covid-19-related disruptions hit, with EVs accounting for a low single-digit percentage of overall automotive sales over the last two years. It’s very likely that the passenger vehicle market will transition almost entirely to EVs in the coming decades, providing considerable room for growth for EV suppliers.

Within our theme Albemarle stock,, a chemicals company that is also one of the world’s largest producers of lithium, a key raw material for electric vehicle batteries, has fared relatively better compared to other names in our theme, declining by just about 3% year-to-date. On the other side, Aptiv stock,, a company that provides a range of solutions for the auto industry, including autonomous driving technologies, safety technologies, components, and wiring, has been the weakest performer, declining by about 40% year-to-date.

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