With Tesla stock up nearly 40% over the last month and the company releasing better-than-expected car-delivery data in the second quarter, it's time to start thinking that the bottom might be in for the electric vehicle (EV) market. If so, then investors should take a look at stocks like lithium miner Albemarle(NYSE: ALB), machine vision company Cognex(NASDAQ: CGNX), and ON Semiconductor(NASDAQ: ON) because they will all do well with a better EV market.
Electric vehicles need lithium
More precisely, the batteries that power EVs need lithium. That's the key demand driver for lithium and why investors in lithium stocks always focus on the EV market when considering the demand side of the equation. Albemarle is the leading player in the market, and its stock has come under pressure as EV sales growth has slowed and lithium inventories are relatively high.
These factors have resulted in a downtrend in the price of lithium carbonate such that it's now six times less than its peak in the winter of 2022.
However, if Tesla's delivery figures mark a bottom in the market, is Albemarle a stock to buy? There's reason for caution here, which relates to the supply side. There's no lack of lithium in the world. New supplies will likely come online in the coming years, with countries like Serbia, Argentina, and Bolivia looking to develop mines or expand production. As such, Albemarle may not be the best stock to play this theme right now.
Cognex Corporation's end markets look set to recover
The machine vision company's key end markets are logistics (e-commerce warehousing), automotive (including EV batteries), and consumer electronics. These markets have been challenging in recent years, with relatively high interest rates curtailing consumer-discretionary spending and with a natural correction in e-commerce warehouse spending after its previous boom during the lockdown period.
That said, there are signs of a bottoming process in logistics (not least of which is FedEx seeing an improving outlook for e-commerce spending) and semiconductors in 2024. The one remaining shoe to drop is automotives, and management sounded a dour note on it in May: "EV battery revenue continues to be lumpy, and in the first quarter, we saw customers delay some project spending as they face uncertain near-term demand."
Over the long term, it's highly likely that Cognex's automotive-related revenue, particularly EV-related revenue, will recover, and Tesla's update is a great sign of the potential. However, given management's commentary on current conditions, it may be too early to conclude that there will be a pickup just yet. As such, Cognex is a stock worth monitoring closely, not least because it is trading at 62 times Wall Street analyst-earnings expectations for 2024.
ON Semiconductor's long-term growth prospects
While there are question marks over the direction of lithium prices for Albemarle and Cognex's valuation, which is somewhat concerning, ON Semiconductor may represent the best way to play the theme.
Management has decided to focus on the industrial- and automotive-end markets with intelligent power and sensing solutions. Given the growth potential for EVs, advanced driver assistance systems (ADAS), EV charging and infrastructure, and factory automation, these are highly attractive end markets.
While there are undoubtedly strong, underlying, long-term secular-growth drivers (independent of the economy) in these end markets due to their technological edge, there's still a large cyclical element (meaning it correlates to the economy). Indeed, the slowing EV market has put pressure on the company's stock, leading to a reduction in its full-year 2023 growth expectations in October.
That weakness has spilled over into 2024, with CEO Hassane El-Khoury noting in April that while the total addressable market (TAM) for its silicon carbide chips will still expand this year, it will be "at a lower rate than previously anticipated." In common with Cognex, ON Semiconductor faces some ongoing near-term risk, and it's premature to expect too much too soon.
That said, recovery is inevitably on its way, and the Tesla news may be a very early indicator. The company is displaying its confidence in that by recently announcing a multiyear investment of up to $2 billion in a silicon carbide manufacturing facility in Europe in anticipation of growth.
Image source: Getty Images.
Moreover, unlike Cognex, the decline in the share price has left ON Semiconductor looking like an excellent value. Trading on less than 19 times Wall Street estimates for free cash flow in 2024 , the stock is a rare value. As such, it will suit enterprising investors willing to tolerate the potential for some near-term bad news.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cognex, FedEx, and Tesla. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.
