Investment Opportunity Breakdown: Electric Vehicle Battery Stocks

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Electric vehicle (EV) batteries are used to power the electric motors of battery electric vehicles and hybrid electric vehicles. Electric vehicle batteries support clean energy initiatives because they are rechargeable and do not emit any harmful gases that cause damage to the environment. This has made some battery stocks appealing among environmental, social and governance (ESG) investors.

According to Business Wire, “The global EV batteries market is expected to grow from $19.78 billion in 2020 to $22.99 billion in 2021 at a compound annual growth rate (CAGR) of 16.2%. The market is expected to reach $38.32 billion in 2025 at a CAGR of 14%.” Increasing demand for electric vehicles, improvement in battery technology, supporting government policies and regulations and the launch of new plug-in EV models are fundamental growth drivers for EV battery stocks.

EV Batteries: Key Considerations

In order to operate an electric vehicle, an enormous amount of power is required. The average electric vehicle requires 30 kilowatt-hours to travel 100 miles — the same amount of electricity an average American home uses daily. 

Electric vehicles not only require batteries that can hold a significant amount of energy. They also must be lightweight enough to carry or move, and be safe for the user. 

When purchasing an electric vehicle, many consumers consider “driving range” as the most important factor in their decision-making process. As a result, most battery development is focused on enhancing energy density to put more energy into the same volume.

Most EVs today use lithium-ion batteries, which are a combination of lithium, nickel, cobalt and aluminum. These batteries have higher energy density compared to lead-acid or nickel-metal hydride batteries and a relatively compact size.

Sustainability Is a Concern for New Battery Architectures

With the demand for electric vehicles growing at an unprecedented pace, the environmental impact of the mining and extraction of raw materials like lithium cobalt is becoming an increasing global concern. For example, the extraction process of one ton of lithium requires 50,000 gallons of water. Lithium mining has resulted in consumption of 65% of the water supply of the Salar de Atacama region, Chile. This has ultimately led to water shortages and severe toxic spills. As a result, governments have imposed restrictions on mining these raw materials. 

In an effort toward increased sustainability, carmakers have begun to shift from lithium-ion to LFP (Lithium Iron Phosphate) batteries. LFP batteries are gaining traction over conventional Li-ion battery chemistries because they cost less, they don’t require any nickel or cobalt and they’re also more stable, which makes them safer. According to CNBC, “[a]round 95% of LFP cathode manufacturing is produced in China.” Industry leader Tesla (NASDAQ:TSLA) has announced in October 2021 that it would primarily use LFP chemistry going forward. 

New Battery Chemistries 

The goal of new battery new chemistries and architectures is to increase both power and energy density simultaneously. This will lead to both faster charging and a longer range, further bolstering the use-case for EVs further down the road.

According to Addionics, a producer of rechargeable batteries, “[c]utting edge advances in EV battery chemistry today encompass the use of silicon as the anode in lithium-ion batteries, and solid-state batteries.” These batteries do not use liquid electrolytes that facilitate the movement of electrical charge. 

Solid-state batteries promise better safety, faster charging, lower cost and better EV range. While solid-state batteries offer significant advantages, they haven’t yet been successfully manufactured at scale. Leading companies in this space include QuantumScape (NYSE:QS) and Solid Power (NASDAQ:DCRC), which is backed by automakers BMW (OCTMKTS:BMWYY) and Ford (NYSE:F).

EV Battery Stocks: Key Market Drivers  

The largest driver for battery stocks is demand for electric vehicles (see EV overview). In the U.S., a key industry catalyst is the U.S. Infrastructure Bill, which plans to build 500,000 electric vehicle chargers across the country in an effort to advance clean energy projects and capture a larger portion of the global EV market.

In order to support increased demand for electric vehicles, car companies are developing business models like battery swapping and battery-as-a-service (BaaS) that allow users to change/swap EV batteries once discharged. This saves users the time spent on recharging the batteries, thereby improving customer satisfaction and addressing one of the main reasons consumers refrain from choosing EVs.

Several Chinese EV battery manufacturers including NIO (NYSE:NIO) follow the BaaS model that decouples the battery from the EV. The BaaS model enables EV owners to rent battery services monthly instead of buying a battery with the EV. The model has two major advantages: consumers can save money on battery cost, and they do not have to worry about battery depreciation.

Electric Vehicle Battery Suppliers 

The following is a list of the key battery stocks to consider within the space today:

In addition to vehicle manufacturing, Asia is at the core of innovation in the battery sector. The top three electric vehicle battery producers are Asian suppliers: Contemporary Amperex Technology, LG Electronics and Panasonic (OTCMKTS:PCRFY). Other electric battery companies include: BYD (OTCMKTS:BYDDY).  Lithium Americas (NYSE:LAC) and Ganfeng Lithium (OTCMKTS:GNENF). 

In addition to Quantumscape, U.S. next-generation battery suppliers include: Romeo Power (NYSE:RMO), which makes battery packs for commercial EV fleets, and several privately held companies, including Ionic Materials, Sila Nanotechnologies, Sion Power and Sionic Energy.

Industry Challenges 

The potential harmful environmental effects of electric vehicle batteries is a primary concern and limiting factor for the market. Not only do electric batteries require large amounts of raw materials — they also threaten to leave an exponential amount of electronic waste as they are retired and discarded. Research is underway to disassemble dead batteries and extract valuable metals at scale. 

The ongoing safety of EV batteries is another primary concern bearing down on battery stocks. While EV batteries are generally considered safe, several incidents have raised concerns regarding performance and safety in hot and waterlogged environments. Notably, EV batteries consist of various inflammable materials such as lithium, manganese and various plastics. Lithium is also highly reactive when exposed to water. Many electric vehicles have caught fire while parked

According to the U.S. National Fire Protection Association (NFPA), most EV fires in the country from 2013-2017 resulted from battery power systems. Causes of EV battery fires tend to be heavy temperature fluctuations, heavy rain and overcharging.

In September 2021, General Motors (NYSE:GM) recalled 141,000 Chevy EV Bolts after five battery-related fire incidents. Several other automobile makers — including Hyundai (OTCMKTS:HYMTF), Porsche (OTCMKTS:POAHY) and Volvo (OTCMKTS:VLVLY) — have also conducted recalls for lithium-ion batteries. 

The Bottom Line on Battery Stocks

With interest in more affordable electric vehicles rising exponentially, the market for EV batteries, now worth over $27 billion annually, is expected to sustain double digit-percentage growth over the next decade. With vehicle batteries being the most important limiting factor to growth, continued innovation and competition in this market can be expected.

All of these aspects point to the long-term endurance of battery stocks as means to play the vehicle electrification trend. 

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.

Click here to follow her Behind the Wall series, where she provides the insider scoop on the hottest technologies and trends from today’s business leaders, industry experts and money managers.

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