Everyone wants to invest in the cars of the future. The challenge is the lack of obviously attractive ways to do so.
Sure, you can buy shares of Tesla Inc., the single biggest name in the electric-car industry. But while that's certainly a popular option – Tesla stock is up 70 per cent over the past year – it's also a risky bet on a heavily indebted company that has almost never produced profits and has only just begun to face serious competition from the world's largest auto makers.
Is there a less dicey, less expensive way into the sector? Many people in search of a safer bet are investing in companies that are likely to be key suppliers to the high-tech car industry.
The flurry of buying interest has already pushed some of these stocks into the stratosphere. For instance, Nvidia Corp., a maker of graphics chips, has seen its share price expand by more than 500 per cent over the past two years. Nvidia has won Wall Street's heart because its computer chips play a key role in many artificial intelligence systems, including ones that are expected to be deployed in the next wave of self-driving cars.
Many other tech companies are also vying for their own pieces of the autonomous vehicle market. For instance, Canada's own BlackBerry Ltd. is touting its automotive operating system, which it says can facilitate easy, secure collaboration among all the individual pieces of software in a car. Last month, BlackBerry announced it would collaborate with parts-maker Delphi Automotive PLC, which has developed a self-driving system it intends to sell to smaller car makers.
Of course, some of the world's biggest tech companies, including Apple Inc. and Google's parent, Alphabet Inc., are working on their own approaches to autonomous vehicles. So are a host of smaller Silicon Valley players.
The sheer profusion of names and strategies demonstrates the attractiveness of this market niche. However, it also poses a challenge for investors because it's difficult to know who the long-term winners will be in most of the key technology areas.
Rather than guessing, it may be simpler to put your money into a more straightforward proposition – the raw materials that will power tomorrow's electric vehicles. Investors who choose to go this route tend to focus on cobalt and lithium, two key ingredients of lithium-ion batteries. In both cases, a sudden spike in demand from battery producers could, at least temporarily, overwhelm supply and send prices soaring.
Cobalt faces particularly tight supply constraints, because the metal is nearly always produced as a byproduct of mining other commodities, such as nickel and copper. Its second-string status makes it difficult for miners to increase cobalt-only production, meaning that supply shortages could persist for a long time. However, the same factors also create a puzzle for investors: How do you bet on a metal that is mostly produced as an afterthought?
Cobalt 27 Capital Corp., a Toronto company, offers one possible answer. It intends to offer a pure play on cobalt by building a physical storehouse of the metal and negotiating royalty agreements with mines that produce cobalt.
The payoff from this strategy is uncertain, to say the least, but if battery demand for cobalt grows as quickly as projected – consultant Wood Mackenzie sees a fourfold increase by 2020 – Cobalt 27 shareholders may profit.
If cobalt doesn't appeal, investors could choose to jump into the frothy market for lithium, which has been booming lately as a result of anticipated battery demand. To be sure, the current excitement in the sector seems to be a temporary phenomenon. There is an abundance of lithium in the Earth's crust and a profusion of identified resources. The lithium triangle that sprawls across a vast expanse of Chile, Bolivia and Argentina holds a vast supply of the metal, as do hard-rock deposits on other continents. So any supply shortages are likely to last only as long as it takes to bring new production on stream.
However, that geological reality hasn't deterred investors from driving up the share prices of many lithium producers. Neither has it stopped companies in China, home of the world's largest market for electric cars, from bidding aggressively for prime lithium assets as they attempt to lock in supply.
Right now, the most attractive property on the market is a $4-billion (U.S.) stake in Sociedad Quimica y Minera de Chile, the world's largest lithium producer. The SQM stake is being put on the market by Potash Corp. of Saskatchewan Inc., which is selling it as part of the regulatory conditions attached to its impending merger with Agrium Inc. Sinochem, the Chinese giant, is among the bidders, according to the Financial Times.
SQM, which trades on the New York Stock Exchange, isn't cheap: It sells for about 45 times earnings and has doubled over the past year. The company also has political issues surrounding its ties to Julio Ponce, the son-in-law of former Chilean dictator Augusto Pinochet. Still, it controls rights to some of the world's richest lithium deposits. It's difficult to imagine any lithium-intensive future that doesn't involve SQM.
Investors could do worse than to look at SQM and other major producers of lithium, such as U.S. giants Albemarle Corp. and FMC Corp. They're not sexy, but they offer one relatively straightahead way to bet on the high-tech future of the automobile.