Electric megatrend

I daily look through a long series of charts of stocks listed on several stock exchanges. This is a conscious search for patterns, with the aim of being able to find supposedly attractive opportunities. While the general picture in 2022 has been both weak and chaotic, there will always be some glimmers of light. It is particularly exciting when several of the stocks that show strength come from the same sector or can be linked to common underlying drivers. One of these has been Oil/Oil Service, about which I wrote an article a while ago. While these are companies that can be said to belong to the "old" energy system in the world, it is interesting to see that another group of energy-related stocks has also shown strength. What they generally have in common is that they are on the front line in the transition to new uses of electricity. It’s about batteries, electric vehicles (EV) and everything related to this. What lies behind?

As usual, there is probably not just a single cause, but a combination of conditions that is at work when you see a trend/tendency being established. Brokerage houses, industry organizations and journalists write a lot about these topics, and I will not claim to have any revolutionary conclusions. However, based on my own experiences, the technical movements I see, and the fundamental info I have access to, I will make some observations:

• People's experiences with electric cars are good, and the impression spreads as more people use them. I myself bought a Tesla Model S back in 2015 and still have it. The car had been on the market for a while, but this was the first model to come with four-wheel drive, a long enough range, and enough space for it to be a full-fledged family car. The batteries work surprisingly well. I have now driven 140,000 km with the car and register approx. 4% lower efficiency (range) on the battery compared to when it was new. Service and maintenance costs are small, and the software updates itself. The car's computer is thus experienced as getting better over time, like an iPhone on wheels. It is completely out of the question to ever switch back to a fossil car.
• Charging electric cars has gone from being challenging to being easy. In addition to Tesla's own superchargers, there are now high-power electric car chargers almost everywhere. Charging is quick and easy. If you drive long distances, charging is completed in the time it takes for a coffee or a visit to the toilet. Not unlike filling the tank of a fossil car. More and more people are also installing home chargers.
• The electric motor itself is far more energy efficient than a fossil combustion engine. An estimated 85-90% of the energy from the battery goes to propel the car. For the very most efficient diesel and petrol engines, the figure is about 25%, while the rest of the energy is lost in heat loss etc. If you used oil to make electricity in a power plant and tapped the power on electric cars, you would thus get 3-4 times as many kilometers driven out of the energy in the oil. The physics behind this is robust and is probably the long-term main reason why the electric motor wins over time. It is simply a better utilization of the world's energy resources.
• While Tesla paved the way with innovation both in the electric car itself and in the charging network, many others have now followed suit. The range of electric cars is large and growing rapidly. In most markets, electric cars are still more expensive than comparable fossil cars, but this is quickly changing. A strong driver for a lower price is an increased degree of mass production from several manufacturers, while another is the battery itself. The costs are on the way down, and the effect is on the way up. Taken together, this is a strong force for change.
• My home country of Norway is among those that have come the farthest when it comes to switching to electric cars. In the first half of 2022, the electric car share of new cars sold was 79.1% in Norway, and all the cars in the top 10 were electric cars. This has happened faster than anyone had thought and may give a hint as to what can be expected in other markets as well. This has dawned on the global car industry, and there is tremendous pressure to win this race.
• Also in other application areas, we see that better and cheaper batteries create changed behavior, new products, and strong demand. Just mention e-bike or e-scooter and everyone will understand what I mean. Drones in both small and gradually larger sizes are another example. We will see much more of this going forward.
• The development of batteries is not static. We see what today's batteries have led to in terms of change. What will happen if the size is halved a second time for the same effect? If the price is halved per kW of power? If the effect is doubled? All of this is underway and will come in the years to come. Growth is not linear, but exponential.
• While batteries for electric cars, bicycles and the like are what most people have experience with, there is also a rapidly growing focus on industrial application of energy storage using batteries. The strong growth in renewable energy production creates major challenges. Traditionally, electrical energy has not been stored, but consumed at the same rate as it is produced. With sun and wind, however, this is difficult, and leads to large intraday fluctuations. Batteries can be used to break the link between production and consumption, thus making this whole system far more efficient. If you go to energy conferences, you will see that storage is a central theme for a number of large industry players. Significant investments will be made, both in use and in production of such systems.

Which stocks can give you exposure to this development? Well, there are a many players within a number of niches, and how to best position yourself is challenging. In general, however, you can say that there are at least 3 types of players. One is the large industrial groups, where batteries, electrical equipment, electric cars, production of battery materials and the like make up only a small part of the turnover. Among these are Siemens, ABB, or Norsk Hydro. By buying such stocks, you get a lot of other business on the purchase, and there is thus no pure exposure.

At the other end of the scale, there are a number of small or medium-sized players who have a varying degree of maturity for their products or projects. Among these there are many that have unproven technology, or where the runway to mass production is long. For a general investor, maneuvering among these can be a bit like investing in biotechnology. One must be prepared for the fact that an estimated 1 in 10 companies will really succeed, 3-4 will do OK and the rest will disappear.

The last category is the companies that appear to be leaders in the development per today, and it is among these that we find the hottest stocks. So which ones are these? Well, the shining star is of course Tesla (TSLA). They are the leader in EVs, have one of the largest charging networks, are on the forefront in battery development and among those with the fastest growing production capacity of batteries. While many people know them as a car manufacturer, fewer know that Tesla is also a leader in energy storage. Add solar cells and batteries for home use, software, AI, driving data and a subscription model for software and services. You get everything in TSLA.