Investment
Why Porsche is investing $100 million on eFuels to keep its cars on the road
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Porsche’s bestselling cars today are SUVs, a far cry from what the luxury brand built its reputation on — small, nimble and, above all, unique rear-engine sports cars like the 911.
Now the famous German automaker is faced with the challenge of how to maintain a connection to its illustrious heritage, and its distinct brand identity, in the EV era. The answer might be something called eFuel — or fuel made in a factory partly from carbon pulled from the atmosphere.
Porsche has invested more than $100 million in the development of eFuels. The company argues that fully converting its 1.4 billion-vehicle global fleet to electric vehicles will take too long to meet climate change mitigation goals, so it has decided to go this new route.
In late March, the European Commission, the executive body of the European Union, included an exception for eFuels in a proposed ban on internal combustion engines set to take effect in 2035.
“With this approach we have another lever, another opportunity to reduce the CO2 footprint for the combustion engine-driven cars,” said Karl Dums, senior manager of eFuels at Porsche. Before he joined the project, Dums was one of the engineers who worked on the Taycan, automaker’s first EV.
The Taycan, which was launched in 2019, has been a double-barreled success. It accounts for 11% of Porsche’s total sales and makes a profit, which is a rare feat for an electric vehicle.
“Electric cars are more expensive to produce, so they are margin dilutive,” said Daniel Schwarz, managing director at Stifel. “And Porsche managed to increase the share of electric cars and increase the profitability in parallel.”
Porsche plans to electrify 80% of its lineup, but some iconic models — especially the 911 — may never make the transition.
“It’s really brand defining and an iconic product,” Schwarz said of the 911. “And due to its architecture, the engine and most of the weight being on the rear axle, it’s not easy to electrify if you want to keep the driving characteristics unchanged.”
Porsche also believes a large share, roughly 70%, of all its vehicles ever made are still on the road. The brand also is a favorite among collectors. Industry analysts say its heritage, embodied in these older cars, is part of what gives Porsche its status and mystique, and, what’s more, helps to carry the brand’s reputation on to the next generation of car lovers.
But critics of Porsche’s $100 million push into eFuels argue the resultant fuel will be too expensive and inefficient to ever compete with electrification.
“I honestly don’t understand why some of these automakers are interested in eFuels, because it just doesn’t make sense from a cost perspective,” said Stephanie Searle, director for the fuels program and the U.S. region at the International Council on Clean Transportation. The group is a nonprofit that researches technologies used for carbon reduction.
The ICCT expects EV costs to continue to decline rapidly, and reach purchase cost parity with gasoline cars and SUVs somewhere between 2025 and 2030, depending on the vehicle.
“EFuels only make internal combustion engine vehicles more expensive,” Searle said. “We’re finding that if we produce them today, it would cost something like $10 a gallon at the pump for consumers.”
But Porsche says costs can be brought down to a level acceptable to at least that portion of customers who are willing to pay more money to keep classic vehicles and high-end sports cars on the road for years more to come.
Times are tough in the mortgage space right now. Rising interest rates led to a collapse in mortgage originations, and mortgage-backed securities have been out of favor among investors for the past 15 months or so. Mortgage real estate investment trusts (mREITs) were beset by declining asset values and have had to cut dividends. These factors explain mREITs’ massive share price underperformance since the Fed started hiking rates last year.
Under these circumstances, is AGNC Investment (AGNC 0.62%) — the best known mortgage REIT — a buy?
Image source: Getty Images.
Mortgage REITs are different than traditional REITs
Most REITs invest in physical properties like office buildings, malls, or apartment complexes, and then lease out space to tenants. It is an easy-to-understand business model. Mortgage REITs use a different model: Rather than investing in properties, they invest in real estate debt — in other words, mortgages. Instead of collecting rent payments, they collect interest payments. In many ways, they look more like banks or hedge funds than landlords.
AGNC Investment focuses on mortgage-backed securities (MBS) that are guaranteed by the U.S. government, so it has minimal credit risk. If a borrower fails to pay their mortgage, the government ensures that AGNC Investment gets paid on its investment. These securities tend to pay low interest rates because of the government guarantee — low risk equals low returns. This means that mortgage REITs generally must borrow a lot of money to turn a bunch of securities that pay interest rates in the mid-single-digit percentages into dividend yields in the teens.
Mortgage-backed securities are under pressure
Over the past year, mortgage-backed securities have underperformed Treasuries as benchmark interest rates were raised. You can see the effect in the chart below, which looks at the difference between the prevailing mortgage rate and the yield on Treasuries. The higher the line goes, the greater the underperformance (“widening MBS spreads” in trader parlance) and the higher the risk of a dividend cut.
Fundamental Chart data by YCharts.
The underperformance of mortgage-backed securities results in the book value per share of mREITs declining, which puts them at risk of needing to cut their dividends. There have been three main drivers of MBS underperformance recently:
- The Fed’s ongoing policy of fiscal tightening.
- The exit of the Fed as a regular buyer of the securities.
- The supply of mortgage-backed securities from banks that saw big regional banks get into trouble because they held MBS that were underwater.
AGNC Investment held onto its portfolio of MBS, so their declines in value will translate into higher returns going forward. On the first-quarter earnings conference call, Chief Executive Officer Peter Frederico said that the expected return on its portfolio was a percentage in the mid-teens, and asserted that the company can support its dividend. That said, AGNC cannot ignore declines in book value per share, so, at some point, it might have to cut the dividend if mortgage-backed security underperformance continues.
The dividend is no sure thing
Investors who look at AGNC Investment now are probably going to be attracted to its dividend, which yields 15.2% (based on its current share price and recent distributions). However, the continuation of payouts at that level is no sure thing. The stock trades at a premium to book value per share. However, with the MBS spread increasing, its book value per share is probably declining. With mortgage REITs, it is important to remember that book value per share is a moving target.
Mortgage-backed securities are the cheapest relative to Treasuries they have been since the mid-1980s. There is no doubt that valuations are attractive. The problem is that the fortunes of AGNC Investment are tied to Federal Reserve policy, and while most strategists believe the central bank is near the end of its rate-hiking period, that is no sure thing either. Investors considering buying AGNC for the dividend should keep all of that in mind.
Growth stocks are enjoying huge gains in 2023 so far due to the hype surrounding artificial intelligence and expectations of a slowdown in interest rate hikes. Further, recent economic data reflects slowing inflation and a decrease in the yield on long-term government bonds. Interestingly, this makes for a favorable scenario for growth stocks.
To help investors choose the best growth stocks from the entire universe, TipRanks offers a Stock Screener tool. Using this tool, we have shortlisted five stocks that have received a Strong Buy rating from analysts, and whose price targets reflect an upside potential of more than 20%. Also, they carry an Outperform Smart Score (i.e., 8, 9, or 10) on TipRanks. Lastly, these companies’ revenues have witnessed a strong compound annual growth rate over the past three years.
According to the screener, the following stocks have the potential to grow and are analysts’ favorites.
Investment
Nvidia is up 163% this year and worth nearly $1 trillion—here's what to know before investing – CNBC
You’d be hard-pressed to find a hotter stock than Nvidia right now.
From the start of 2023 through June 8, the stock has returned more than 163% — a meteoric rise that has the chipmaker flirting with a $1 trillion market capitalization.
Currently, only four firms can say that the total value of their outstanding shares eclipses $1 trillion: Apple, Microsoft, Google parent company Alphabet and Amazon.com.
Nvidia differs from these firms in one key way: valuation.
Valuation is a blanket term that generally refers to the ways in which the market assesses a company’s worth. This is generally measured by comparing a firm’s share price with one of its underlying financial metrics such as earnings, revenue or cash flow.
When you buy a stock, you’re buying a share of a going concern that you expect to grow into the future, and stock prices typically reflect this potential growth. In essence, investors are willing to pay more for a company than what it’s worth today.
One way to measure this phenomenon is examining the company’s stock price compared to a fundamental measure, such as earnings or sales. If a company realizes $1 in earnings per share and trades for $10 a share, it’s said to have a price-to-earnings multiple of 10.
How a particular stock’s multiple compares to its own history (has it had this high a multiple before?), to peer companies (do tech companies tend to have high multiples?) and to the stock market at large (how does this firm compare to the average S&P 500 company?) determines whether investors consider a stock over- or undervalued.
Warren Buffett looks for stocks that trade cheaply compared with their underlying value — a strategy known as value investing. Other investors are willing to pay a large premium for a company they expect to deliver explosive growth.
Now, let’s get back to Nvidia and the trillionaires.
Nvidia’s stock currently trades for 204 times the company’s earnings per share. That’s lower than Amazon’s multiple of 296, but Amazon has always been an outlier in this regard; the retail giant rakes in boatloads of cash that it could convert to earnings if it wanted to. Microsoft trades for 35 times earnings, Apple for 31 times, Alphabet for 27.
Compare stock prices to sales and the difference grows starker. Amazon trades at 2.4 times sales, pretty much in line with the average S&P 500 company. Alphabet’s price-to-sales ratio is 5.6, Apple’s is 7.5 and Microsoft’s is 11.7.
Nvidia’s: 37.8.
What Nvidia’s high valuation means for investors
Based on earnings and sales, Nvidia comes with a higher price tag than the four biggest stocks on the market.
That doesn’t mean you shouldn’t buy it, or that you should sell it if you already own it. Rather, any prospective investor in Nvidia should do two things, investing experts say.
1. Examine the hype
Nvidia is not a meme stock. Investors are piling in because they believe in the fundamentals of the chipmaker’s business.
Namely, they think Nvidia has a chance to be the largest beneficiary of a technological revolution: artificial intelligence.
Nvidia is the dominant player in graphics processing units — an essential component for running AI in the cloud. Tech investors have seen this as a compelling opportunity for years, and Nvidia got a boost when OpenAI released viral chatbot ChatGPT earlier this year.
“It was an iPhone moment,” says Angelo Zino, senior industry analyst at CFRA. It forced companies across a wide range of industries to rethink how and how much they’ll be investing in AI.
“That makes it really hard to look at those conventional valuation metrics when assessing the magnitude of this opportunity,” adds J.R. Gondeck, managing director with the Lerner Group at Hightower Advisors.
Basically, investors are paying big now in the belief that the company’s fundamentals will eventually justify the price tag, and even make it look cheap in hindsight.
“Given the growth opportunities we see ahead, we think the multiple is fairly reasonable,” says Zino.
2. Prepare for volatility
If you believe in the long-term potential of a hyper-growth stock like Nvidia, you have to be willing to stomach some big drops in the value of your investment to reap the benefits, say investing pros.
During broad market selloffs, companies trading at the highest multiples often get hit the hardest. When investors are betting huge on a company’s future, and that future suddenly looks bleaker, things can get scary in a hurry.
“No tree grows to the sky,” says Gondeck. “You look at Apple, which recently hit an all-time high, and there were plenty of entry points along the way.”
Of course, they’re only “entry points” — or, buying opportunities — with the benefit of hindsight. If you’ve held Apple stock for decades, you’ve likely made a pretty penny. You’ve also experienced two drawdowns of more than 80%, between 1991 and 1997 and between 2000 and 2003.
“If you’re a long-term investor in Nvidia, there’s going to be a lot of volatility along the way,” says Zino.
To keep these sort of downdrafts from derailing your portfolio returns, build a core portfolio of broadly diversified exchange-traded funds and mutual funds, financial pros say.
And keep your individual stock bets to a relatively small corner of your portfolio. If you pick right, it’s a cherry on top of your portfolio’s performance. If not, you’re still theoretically on track to meet your financial goals.
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Check out: Nvidia is worth nearly $1 trillion—here’s how much you’d have if you invested a decade ago
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