August 15, 2022
By Dylan Blanch, Summer Intern
At the moment, green energy constitutes 12.2% of the world’s annual energy consumption, and by 2030 that number is expected to rise to between 30-45%. With society attempting to be more environmentally conscious, electric vehicles (EVs) have vastly increased in popularity. In 2021 alone, the electric automobile market rose 83%, and by 2030 executives estimate that 52% of new vehicle sales will be electric. With production for electric vehicles rapidly increasing, demand for the technology and materials used to manufacture them will increase sequentially. Lidar sensors, the technology behind self-driving electric vehicles, are expected to grow at a CAGR (compound annual growth rate) of 21.6% between now and 2026. Additionally, investors can expect steel to climb in value as it is one of the main substances used in the production of electric automobiles. Thus, the gradual shift towards green energy has manifested a value chain driven by a high demand for EVs, and subsequently the technology and materials used to create them.
With a market cap of $902 billion, Tesla (TSLA) is the titan of the electric car industry. However, Covid restrictions continue to plague the company. Factories in Germany and Texas have slowed in production leaving the Shanghai plant responsible for constructing European customers’ cars. Fortunately, with these restrictions beginning to disappear and supply chains improving, TSLA predicts that it will grow over 50% in the next year. Additionally, the Inflation Reduction Act of 2022 will create tax deductions upwards of $5,000 for electric vehicle users, making TSLA’s product more enticing to consumers. The bottom line is that with the stock down almost 30% from its 52 week high, and growth for the following year projected to be upwards of 50%, TSLA is an excellent investment.
Lidar sensors are a piece of technology that use light pulses to create a 3D representation of an object's surroundings. They are primarily used in EVs for self-driving, as it is a necessity for the automobiles to be able to scan their surroundings when in autopilot. Luminar Technologies (LAZR) is the largest manufacturer of lidar sensors, however with no P/E ratio due to negative earnings, and a high Debt/Equity ratio of 5.04, the corporation’s financials show substantial risk. However, despite the risk, Luminar has massive potential. Currently, the company has partnerships with Volvo, Audi, Mercedes, Daimler Truck and Torc, Mobileye, and many other big names in the automobile industry. One of Luminar’s largest milestones occurred on January 20, 2022, when Mercedes partnered with the lidar sensor developer and bought over $20.2 million in stock. The German automaker stated that it will use the company’s lidar sensors for its next generation of vehicles. Additionally, Luminar recently invested in Ecarx, an autotech startup whose cofounder, Eric Li, founded Geely, the largest private automaker in China. With this partnership Luminar has the possibility to provide its technology to many automobiles. To conclude, although Luminar’s financials are not pristine, its strong relationships with titans in the automotive industry could allow the company’s lidar sensors to reach millions of vehicles.
The Role of Steel in Growing Industries
Currently, 55% of an average car’s weight comes from steel. With the electric vehicle market estimated to continue growing at an immense rate, steel suppliers can expect a substantial increase in the demand and price of their product. Additionally, although this paper focuses on steel’s role in the growth of electric automobiles and the automotive industry as a whole, it’s important to note that construction is expected to grow by over 100% by 2030, and accounts for 50% of the global steel demand. With the market recently on the decline, steel company stock prices have plummeted over the past year. This is in large part due to investors’ concern that a slowing economy will lead to an overproduction of steel products that will never be sold once a recession hits. With growing inflation and the GDP falling in the first half of 2022, we are likely headed towards a period of economic stagnation. However, today’s steel market is currently extremely undervalued, with all the worst case scenarios factored into the price. In the long term, steel has enormous growth potential as it is vital to the construction and automotive industries. Cleveland Cliffs (CLF) is both the largest flat rolled steel producer in the United States, and the largest steel supplier to the automotive industry. Due to the bear market CLF shares are down almost 50% from the 52 week high (currently $18 per share). The stock is trading at a P/E ratio of 2.23 and 2.2x EBITDA, indicating an undervalued share price. Last month the company reported that it missed earnings by .02 cents per share after paying .13 cents per share to pay off debt. However, through doing this CLF was able to achieve the largest quarterly debt reduction in its history. Additionally, the steel producer increased revenue by $500 million (to $6.34 billion) and total assets by over $100 million. This demonstrates that despite missing earnings per share estimates, CLF boasts strong financials, and is prepared if the economy continues to shrink. Nucor (NUE) is another giant in the steel industry. Similar to Cleveland Cliffs, NUE is undervalued, with a low P/E ratio of 4.66. Additionally, over the years NUE has increased the dividend yield for its investors to a current 1.43%. On July 23rd the company announced record breaking earnings, with net income per share up $5.04 year-over-year. However, despite a strong quarter, share prices are down alomost $50 from the $187.90 52 week high in April. Low prices are tied to the fact that the price of steel fell by $115 dollars per pound (7.8%) in May of 2022. This can be attributed to investors’ worries that there will be an overproduction of steel as we potentially head towards a recession. Thus, as stated earlier, the worst case scenario is already factored into the stock price. With steel an important component in infrastructure and car production, the rewards far outweigh the risks. Although not directly a steel stock, Caterpillar (CAT) is the world’s largest provider of mining and construction equipment. Entering the economic slowdown, CAT dropped over 18%, and is now down about $50 from its 52 week high. Similar to the steel stocks, CAT’s sudden drop in share price can be attributed to investors’ concerns that as we enter a recession there will be an abundance of steel, and CAT’s equipment will no longer be as necessary to producers. As previously mentioned, fear of an economic slowdown is priced into the value of the stock, and in the long run steel, and subsequently CAT, will play a large role in creation of both improved infrastructure and electric vehicles.
To conclude, as the world begins to transition to green energy a value chain forms, in which electric vehicles are at the forefront, and the components used to create them, including lidar sensors and steel, increase in value and demand, which should, in turn, lead to substantial gains in the share prices of the companies that produce these products.