Value-focused investors have long been finding it difficult to wrap their head around the valuations of electric vehicle (EV) stocks. In 2021, Ford Motor Company (F 0.12%) stock joined this list of EV companies whose stocks seem to be defying gravity. Its stock price has risen to a level not seen in two decades. Let's discuss what's behind its steep rise and how it may fare going forward.
Ford's stock continues to rise
The automaker's stock rose 136% in 2021 and continues to rise in the new year, already up 21% so far in 2022. If you invested $10,000 in Ford's stock a year back, your investment would have risen to $25,630 as of this writing on January 17th.
Ford fared better than top rival General Motors (GM 4.43%) in the past year. Its vehicle deliveries for the year were less impacted by supply shortages than those of General Motors. However, that alone couldn't justify the stock's spectacular rise.
F Market Cap data by YCharts
Investors seem to be increasingly cognizant of the massive gap in the valuations of newer pure-play EV companies versus those of traditional automakers. And they are likely appreciating that such a huge difference may not be warranted.
Ford's EV strategy
Ford has huge plans in the electric vehicle segment. Developments in the past year suggested that the company is not only serious about its EV ambitions but can also convert them to reality. Ford's CEO, Jim Farley, announced in November that the company plans to increase its annual EV production capacity to 600,000 vehicles by the end of 2023. That's twice what the company was aiming for earlier.
Image source: Ford.
Moreover, Ford wants to be the second-largest EV maker "within the next couple years." So, Ford could be moving faster than its previously announced plan of making 40% of all its vehicles electric by 2030.
Frankly, its plan is yet to be implemented. But that's true for all EV makers' plans. Therefore, investors are likely right in thinking that Ford's plans have at least an equal likelihood of turning into a reality compared with new pure-play EV makers.
That seems to explain Ford stock's rise, even as other EV stocks, including Rivian Automotive (RIVN 3.64%), Tesla (TSLA 2.40%), and Lucid Group (LCID 1.47%), fell in the past couple of months.
Ford's decision to go ahead with its own EV strategy and ending its partnership with Rivian also likely made investors more convinced about Ford's confidence and its potential success in the EV market.
Ford progressed well in the EV segment last year. The company sold 12,284 EVs in December, up 121% year over year. It sold 27,140 Mustang Mach-E vehicles in 2021, making it the second best-selling fully electric SUV in the U.S., behind only Tesla's Model Y.
Could Ford stock rise higher?
One of the key assumptions behind EV stocks' high valuations is that, compared with traditional automakers, EV companies can potentially generate higher margins and recurring revenue through software updates and services. Like other top EV makers, Ford started offering 'over-the-air' software updates for its vehicles last year. Chargeable drive assist features, like BlueCruise, are available only on selected Ford models.
F Profit Margin (Quarterly) data by YCharts
Tesla generated higher margins compared to other automakers in the last quarter. Whether EV companies can generate sustainably higher margins remains to be seen. Evidence so far suggests that they can. Notably, internal combustion engine (ICE) vehicles right now dominate Ford's sales. Even by 2030, if Ford goes as per its plans, 60% of its sales would still be ICE vehicles, which could limit the company's overall margin growth. Further, companies' margins on EVs will also most likely come down over time as competition increases.
Yet, if EV stocks retain higher valuations compared with traditional automakers, and if Ford delivers on its electrification plans, there seems some scope for further expansion in its price-to-earnings and price-to-sales multiples. That's because Ford's EV segment would be an increasingly bigger chunk of the company's business in the coming years.
F PE Ratio data by YCharts
Notably, Ford faces competition from legacy automakers, including Volkswagen and General Motors, who are also moving ahead with their electrification plans. Ford stock's high valuation compared with these stocks likely indicates that investors right now have more confidence in its electrification plans.
Ford's clear and visible push for electrification, record reservations for its electric F-150 Lightning model, and a positive response to its Mustang Mach-E model seem to back investors' optimistic take on the company's plans. The stock could see continued momentum in the coming years if Ford successfully executes on its EV strategy.
