Will Changes To EV Tax Credits Impact EV Supplier Stocks?

APTV: Aptiv logo
APTV
Aptiv

Our theme of EV Supplier stocks has underperformed this year, declining by about 16% year-to-date, compared to the S&P 500 which remains down by about 10% 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. Moreover, government incentives for EVs are set to decrease considerably in the U.S. following the passage of the Inflation Reduction Act. Under the new rules, tax credits will apply only to vehicles under a certain price limit (up to $55,000 for sedans and $80,000 for SUVs and trucks) while individuals with a taxable income under $150,000 will be eligible for credits.

However, this is unlikely to meaningfully impact EV demand in our view. Electric vehicle demand has largely outstripped supply despite a weak economy and surging prices. Sales of plug-in electric vehicles in the U.S. rose by almost 66% year-over-year in Q2 2022 to around 196,788 units, per Cox Automotive. This compares to the broader auto sales which contracted by about 20% year-over-year due to supply chain constraints. Tesla’s Model Y – which is the bestselling EV in the U.S. – remains on backorder until at least January 2023 despite the fact that it isn’t eligible for tax credits.

The longer-term outlook for EV makers and suppliers also looks solid. 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 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.

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Within our theme Albemarle stock, (NYSE:ALB), a chemicals company that is also one of the world’s largest producers of lithium, a key raw material for electric vehicle batteries, has been the strongest performer, rising by about 18% year-to-date. On the other side, Aptiv stock, (NYSE:APTV), 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 34% year-to-date.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 APTV Return 3% -34% 60%
 S&P 500 Return 4% -10% 92%
 Trefis Multi-Strategy Portfolio 8% -7% 268%

[1] Month-to-date and year-to-date as of 8/17/2022
[2] Cumulative total returns since the end of 2016

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