Analyst picks two electric vehicle makers that can ride out the global chip shortage

Published Mon, Aug 30 202111:00 PM EDT

The global chip shortage could be a risk for electric vehicle makers in the short term, but one analyst argues there are two EV companies that are still worth investing in right now. Electric vehicles use many more of the in-demand semiconductors than cars with internal combustion engines. But despite potential supply chain issues, Tom Narayan, equity analyst for European autos at RBC Capital Markets, believes patient investors will be rewarded. Tesla and Volkswagen are the stocks he's backing for the long term. "When you're looking at this sector, you really have to look very long term," Narayan said. Volkswagen's shares closed at 284.20 euros ($335.35) on Monday, down from 507.95 euros each in October 2008. "VW is trading as if doesn't have much of terminal value," Narayan said, before going on to argue that the company is the world leader in an EV market that is only going to get bigger. Narayan also noted that Volkswagen owns several other luxury car brands including Porsche, Audi, Lamborghini and Bugatti. "You have so many assets here," he said, adding that VW will "figure out what to do with them" over time. All of these carmakers need an increasing number of chips to power everything from power steering to parking sensors in their vehicles. But demand for chips is continuing to outstrip supply. Harald Kroeger, a member of the Bosch management board, told CNBC on Monday that semiconductor supply chains in the automotive industry are no longer fit for purpose. The chip shortage has already forced Volkswagen to cut its vehicle production, while Tesla has pivoted to alternative chips that are more readily available. "The situation does appear to be getting worse," Narayan admitted. A few months ago, it looked as though vehicle production in the third quarter was only going to fall by 200,000 units, but now it looks closer to 2-3 million units. Vertical integration is key The fact that Tesla and Volkswagen are focused on improving their own battery supply is another factor in their favor, according to Narayan. Both firms have also announced plans recently to make new chips for their cars. Narayan believes they're more "vertically integrated" than other EV makers, meaning they're less reliant on external suppliers than some other car companies as they manufacture more components themselves. "When you're relying on a supplier, some of the responsibility tends to be diffused," Narayan said. "The supplier can blame the OEM [original equipment manufacturer] and vice versa. If the OEM is completely vertically integrated, they're more incentivized to just get it right." Narayan said he expects GM to become more vertically integrated in the future. Demand for EVs Volkswagen had some " early stumbles" in China , the world's biggest car market, earlier on in the year but it's "picking up steam" there now, according to Narayan. Tesla is also seeing reasonable demand for its vehicles in China, he added. Overall, demand for EVs is continuing to rise as new models hit the market at a variety of price points. Last month, an Ernst and Young study found that 40% of people who are in the market for a new car want an EV.

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The global chip shortage could be a risk for electric vehicle makers in the short term, but one analyst argues there are two EV companies that are still worth investing in right now.