Will BMW’s hydrogen-powered cars challenge Tesla’s electric vehicles?

A change in Germany’s political regime could tip the balance when it comes to building ecosystem for cars powered by a hydrogen fuel cell. Local automakers are hedging bets on both technologies and investors are rewarding companies like BMW [BMW.DE] for it.

The BMW share price gained around 20% through 2021 in contrast with pure-play electric vehicle maker Tesla share price that has risen merely 10%.

Germany proposed to invest €8bn into hydrogen technology in May, reported Reuters. Fitch Solutions Analyst Joshua Cobb felt that the EU intends to increase its hydrogen fuel infrastructure, but that it may be two to three years until legislation backing this takes shape. However, the German Green party joining the country’s coalition has the potential to accelerate this timeline. 

BMW and Volkswagen-owned Audi [VWAGY] have pivoted to hydrogen fuel, which it believes could be a viable alternative to EVs.

The future is hydrogen… or EV

As technologies go, hydrogen may be more eco-friendly than electric vehicles, because EVs depend on power generated and transmitted by centralised power stations that sometimes use coal or fossil fuels. A hydrogen fuel cell on the other hand is like a mini power generator. Since hydrogen combines easily with other elements like oxygen to make water the carbon emission from the vehicle is very low.

Brightening prospects for hydrogen investment appears to be nudging the BMW share price upwards. The company is currently trading above its 50- and 200-day moving averages, creating a strong ‘buy’ signal. A relative strength index value of 57.583 bolsters a strong set of technical indicators. 

Yet, given the aggressive mining of lithium and the popularity and standardisation it is much cheaper at the moment to electrify transport.

BMW, Toyota [TM] and Daimler [DAI.DE] lead a 13-company group that is investing $10bn into hydrogen technology and infrastructure worldwide over the next 10 years. Ineos, a chemicals company owned by one of the UK’s richest people, Sir Jim Ratcliffe, is expected to invest £25m into HydrogenOne Capital Growth, a specialist hydrogen fund that intends to raise £250m and float on the LSE later this year. Perhaps this will accelerate standards and manufacturing of hydrogen-based power sources.

For now, though, investment in hydrogen fuel cells remains small-scale compared to that in EVs.

At least $28bn is thought to have been invested into EV companies in 2020 alone, according to CB Insights and Dow Jones Market Data Group data. Ford [F] recently announced that its own spend on EV technology will more than double to $29bn by 2025. Reuters reported in 2019, before industry tailwinds such as the coronavirus pandemic and Joe Biden’s election as US president, that global carmakers would invest $300bn in EV technology over the next 10 years.

Tesla founder Elon Musk has been dismissive about the threat hydrogen poses to the EV market, referring to the technology as “fool cells” in 2020. 

While the debate between hydrogen or EV is traditionally cast as a competition, it might not be a zero-sum game. There is significant uptake of both technologies already, with hydrogen already being used to power ships, aircraft, trucks, cars and trains, as well as the NASA mission that put Neil Armstrong on the moon in 1969. Randeep Somel of M&G Investments has estimated that “around 35% of global emissions cannot be electrified”, so hydrogen could well play a part in greening industries such as steel, aviation and cement production.

BMW shares: a good call

Such applications underlay research from Market Research Future which estimated the hydrogen energy market could grow at a compound annual growth rate of 68.52% to $46.89bn by 2028. 

Tim Rokossa, analyst at Deutsche Bank, placed a ‘catalyst call: buy’ rating on BMW as a short-term investment idea on 15 September. In a note to clients, he maintained a ‘buy’ rating and a €115 target for the BMW share price and said the stock is “just too cheap” given the consistency of its cash flows. 

Consensus among analysts polled by CNN Money is to hold the stock, with 10 out of 22 surveyed giving this rating. Eight recommended ‘buy’ and three ‘outperform’, while a single analyst gave the stock a ‘sell’ rating.