The electric car industry just went mainstream – investors should get in now

Tesla, the current leader in the electric car industry, announced something remarkable last week.

It’s going to share all its patents with any other company that wants to use them.

So traditional car manufactures can now incorporate Tesla’s technology into any electric car they may produce in the future. And they won’t have to pay Tesla a penny.

Tesla’s move may seem dumb at first glance. But I actually think it’s pretty smart – it will accelerate growth in the electric car market, and that should help Tesla.

So does that mean it’s now time to invest in this new industry? And if so, how?

Tesla’s smart move could revolutionise the car market

Let’s start by looking at Tesla (Nasdaq: TSLA) and its decision to give away its patents.

I think there are two potential benefits for the company. Firstly, it should encourage more big car manufacturers to launch electric vehicles. And as more such models are launched, we should see more infrastructure being built to accompany these electric cars – charging points and the like – and that can only be good for Tesla. In other words, wider acceptance of electric cars should lead to higher sales for Tesla.

Secondly – and perhaps more tangibly – Tesla is building a large plant to manufacture lithium-ion batteries. These batteries are used in most of the electric vehicles in development. Tesla’s new ‘gigafactory’ could produce 500,000 lithium-ion batteries a year by 2020. That’s more than were produced worldwide last year. (My colleague, Bengt Saelensminde, wrote in more detail about lithium-ion batteries last month.)

So by giving away its patents, Tesla will probably create more customers for its lithium-ion batteries. It’s a very clever move by Tesla’s founder, Elon Musk.

And Tesla is a very impressive company. It’s come a long way very fast and its latest model S has just been launched in the UK to very positive reviews.

Should you invest in Tesla?

However, I’m not going to buy Tesla shares. I’m very tempted, but I’m going to hold back. The company is expected to generate revenue of $5.4bn (£3.2bn) next year, yet the current market cap is $25.6bn. So it’s valued at almost five times sales.

That’s too much for me. Especially when you remember that the existing car manufacturers will fight back here. They may end up buying Tesla’s batteries, but they will produce cars that are strong rivals to any model that Tesla may produce.

So are there any electric alternatives? Well last October I highlighted BMW (Frankfurt: BMW) as a possible electric car play. Of course, BMW is a traditional car giant but its new i3 electric car is ahead of most of the competition, and I’m sure there’s plenty more innovation to come.

And moving away from electric cars, I’m also really impressed with the way BMW has broadened its product range over the last ten years, but not damaged its upmarket brand. BMW’s share price has moved up 10% since I wrote that article, but at €90, I still think it looks like a pretty decent investment.

Another option is a $2.1bn company called Polypore International (NYSE: PPO). This US company specialises in microporous membranes that are mainly used in batteries.

Last month, it announced a cracking deal with Panasonic where it will provide ‘separators’ – critical components for lithium batteries. Panasonic supplies batteries to Tesla, so there’s plenty of potential for Polypore to grow its sales here.

And even after a rise in the share price last month, the company is trading on a forward price/earnings ratio of 22. So it’s not on a crazy rating and looks attractive.

Warren Buffett’s electric car stock

My final possible investment in this sector is a Chinese company called BYD (HK:1211). It makes batteries, cheap petrol-driven cars, and electric vehicles. It’s listed on the Hong Kong stock exchange.

The big attraction here is that US investor Warren Buffett bought shares in the company back in 2008 and still has a stake now. The investment was primarily driven by Buffett’s partner, Charlie Munger. Munger is apparently very impressed by BYD’s CEO, Wang Chuanfu. According to Buffett, Munger reckons Chuanfu is “the second coming, more or less.”

The shares are on a high rating and I need to do some more research to figure out if that rating is justified. But with Buffett’s backing, it’s clearly worth further investigation.

And that applies to the whole electric car industry. I think it’s pretty clear now that electric cars are here to stay and will prosper. The challenge now is to find the best way to invest in that growth.

By the way, before I go, if you’re interested in big shifts in technology and how to profit from them, you should check out this guide to one of the biggest technological trends on the planet right now. We’re very excited about it – we think you should be too.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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