The electric vehicle (EV) industry is currently slowing down—due primarily to a global semiconductor shortage—following its stellar performance in 2020. Because major EV companies have been scaling back production amid rising costs, their current valuations look expensive. Thus, we think it might be wise to avoid Tesla (NASDAQ:TSLA) and Workhorse Group (WKHS) for now. Let’s discuss.The electric vehicle industry (EV) boom last year, driven by rising concerns regarding climate change, multiple government subsidies, and federal plans to phase out fossil fuel powered vehicles, drove a record level of EV sales in 2020. The IEA reported a record 3 million new electric car registrations in 2020, up 41% from the previous year. This sales level came in at a time when the global automobile market contracted by 16% due to the pandemic-led recession.
However, a global semiconductor shortage has emerged as a major hindrance to the growth of the EV industry, worsened by several natural and man-made calamities. According to consulting firm AlixPartners, the global automotive industry is projected to lose $110 billion in revenue in 2021 due to the ongoing chip shortage. Indeed, due to the rising prices of processor chips, EV manufacturers are scaling down their operations as production costs rise significantly. Consequently, several EV companies’ revenue and earnings growth estimates should remain low for the coming quarters.
Given the bleak growth outlook, the current valuations of Tesla, Inc. (TSLA) and Workhorse Group Inc. (WKHS) seem unsustainable. Thus, we think these stocks are best avoided now.