Headlines for the electric vehicle market are typically dominated by market leader Tesla. However, as environmental, social, and corporate governance (ESG) standards become more commonplace within corporations, Tesla may begin to experience some competition from traditional automakers. In 2021, Ford (F -3.01%) outlined its ambitions to supercharge its business beyond its legacy gas-powered trucks. Over the last 12 months, Ford's stock has risen over 140%. Let's dig in and see if this surge was warranted and if now is a good time to invest in the company.
Current state of the market
Despite the amount of attention electric vehicles garner, the current market size is small. The market is bifurcated into all-electric options such as Tesla, and hybrid electric vehicles, which include electric motors and an internal combustion engine. According to LMC Automotive, sales of electric vehicles, including plug-in hybrids, are forecasted to be less than 4% of U.S. sales in 2021. Tesla dominates the majority of this 4%, while legacy automakers wrestle with the prospects of designing, producing, and selling new electric models over the next decade in an effort to win over new consumer demographics as well as market share from Tesla.
Electric vehicles are increasingly becoming a more attractive choice for consumers due to their range, battery life, efficiency, and affordability. Although the size of the electronic vehicle market is relatively small today, Statista estimates that the global market size will quadruple in size to over $700 billion by 2026.
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Benefits of strategic alliances
In 2019 Ford invested $500 million in Rivian, which produces SUVs and electric pickup trucks. The original thesis behind the investment revolved around a strategic alliance to co-develop electric vehicles. As part of the investment, Ford acquired a 12% equity stake in Rivian. This proved to be a savvy financial move by Ford as Rivian claimed the top spot for the largest IPO in 2021.
Following its IPO in November 2021, Ford and Rivian announced that the companies would be canceling the joint venture. After a series of discussions with Rivian, Ford's leadership indicated that it would be more beneficial to pursue its own path to develop electric vehicles rather than co-develop with Rivian.
Ford's management is confident that it can execute on its goal to be a leader in the electric vehicle space on its own and has been making several strategic moves to get there. For example, at the end of 2021, Ford announced forming a joint venture with SK Innovation, a South Korean battery maker. As part of this alliance, the two companies will spend roughly $5.6 billion on a new campus called Blue Oval City in Stanton, Tennessee, and $5.8 billion for two lithium-ion battery plants in central Kentucky.
Given the number of variables at play and the underlying associated costs, it is reasonable for investors to be wary of Ford's ability to execute. Ford has communicated that it does not plan to fund these investments by assuming additional debt. Despite breaking ties with Rivian, the silver lining is that Ford recently disclosed that it would book a gain of $8.2 billion in its fourth-quarter 2021 financials related to its investment. This is very positive news as the company will be able to reinvest this cash into its electric vehicle roadmap. These investments are exciting to see as Ford looks to better position itself and capitalize on emerging sectors such as autonomous, electric, and connected vehicles.
Is now an ideal time?
On the surface, now looks to be an exciting and tempting time to invest in Ford. The company has a well-planned roadmap and has committed to several strategic investments in an effort to become a significant player in the electric vehicle space. It is important to note that Ford's stock has nearly doubled over the last 12 months. For this reason, it is reasonable to believe that some investor euphoria and positive sentiment around the company's ability to win in the electric vehicle space is already priced into the stock.
Although it is tempting, investors may want to assess the company's next few earnings reports before initiating a position. Ford has laid the groundwork for a successful pivot to electric vehicles. However, investors should keep a keen eye on its production estimates and ability to commercially sell the new vehicles once they are available.
