Share prices of Tesla (TSLA 3.91%) and Ford Motor Company (F 1.15%) both fell after the automakers reported their fourth-quarter 2021 and full-year earnings results. The legacy automotive and electric vehicle (EV) industries are under pressure as inflation and supply chain constraints disrupt operations and threaten delays in long-term plans.

Let's look at where Tesla and Ford could be headed in 2022 to determine which stock is the better buy now.

A blue Tesla Model Y cruises down an open road.

Image source: Tesla.

Moving forward after a breakout year 

Howard Smith (Tesla): Every prospective stock investment should be part of a larger strategy. Otherwise, one could just buy mutual funds or exchange-traded funds that track the overall market. When considering whether to invest in Tesla or Ford, the strategy would presumably be based on gaining exposure to the EV sector. Deciding whether to buy the established leader in the burgeoning sector or an established manufacturer making the transition to EVs involves trade-offs. 

Tesla is richly valued with a market cap of about $925 billion, and it just completed a breakout year with $5.5 billion in net income and increased gross margin to nearly 30% in its recently reported fourth quarter. That's approximately twice the gross profit margin that Ford has achieved over the last several years.

The EV market still being in its early stages can be viewed as a positive and a negative for Tesla. Competition will be ramping up both from barely established start-ups as well as legacy automakers like Ford. But Tesla is also still squarely in growth mode with two new factories in Texas and Germany, respectively, expected to begin production soon. Tesla invested $6.5 billion for those projects and other capital expenditures in 2021, and still generated another $5 billion in free cash flow (FCF) beyond that. 

Tesla is proving that it can navigate a difficult manufacturing environment well. The company delivered about 940,000 vehicles last year and expects to experience 50% average annual growth in vehicle deliveries over the next several years.

Meanwhile, Ford and other automakers are struggling to navigate supply chain constraints. Most recently, Ford said it will be cutting production on several popular (and profitable) vehicles due to parts shortages. These include the F-150 and Ranger pickup trucks, its Transit cargo vans, and the new Mustang Mach-E electric crossover, according to a CNBC report. 

Tesla has proved it can manufacture at scale, continue to grow, and be hugely profitable along the way. Even with its high valuation, for exposure to the EV sector, Tesla still looks like it could be a better long-term investment than a legacy automaker like Ford.

Ford is at the top of its game

Daniel Foelber (Ford): During its fourth-quarter 2021 earnings call, Ford said that it now expects semiconductor challenges to persist throughout 2022, damaging its ability to ramp up production fast enough to satisfy high demand. Throughout 2021, Tesla showed impressive resolve in navigating the crisis. But on its fourth-quarter 2021 conference call, Tesla said that it also expects the chip challenge to carry on throughout the year, and that supply chain issues are affecting all of its factories.

This is a pivotal year for Ford as it plans to roll out the F-150 Lightning electric pickup in a few months and make progress toward increasing total EV production capacity to 600,000 units per year by 2023. There's no doubt that the supply chain and semiconductor challenge throw a layer of unpredictability into these plans. But Ford appears to be doing an impressive job with what it can control.

Tesla's high margins and record profitability and FCF were mentioned above. Tesla deserves immense credit for these accomplishments, and there are strong reasons the stock deserves a place in a diversified EV portfolio.

However, Ford is also ramping spending as it takes aim at making EVs 40% of sales by 2030. And yet, it is guiding for 15% to 25% higher earnings before interest and taxes (EBIT) in 2022 and adjusted FCF of $5.5 billion to $6.5 billion, the midpoint of which is 31% higher than 2021's adjusted FCF. 

Ford quantified the effects that rising inflation is having on its business, forecasting commodity-price headwinds of $1.5 billion to $2 billion in 2022. And yet, it expects its North American EBIT margin to increase to 10% in 2022, a goal it originally set for 2023.

The short-term risk is that Ford's plans could be derailed by factors outside of its control. And if that happens, the company could find itself overpromising and underdelivering, and delaying medium-term goals as we saw with its fourth-quarter 2021 figures.

However, a long-term perspective could flip that narrative completely by looking at Ford's business and seeing how strong it is performing during a challenging time as a foundation for even stronger future performance during easier market conditions. Ford's aggressive spending in product categories where it has an edge, specifically the electric pickup truck market, could end up being the company's best strategic shift since it began pivoting away from making sedans in favor of crossovers, SUVs, and pickups. Add it all up, and Ford looks like a long-term winner that can outlast the present challenges better than its competition.

Two great buys for the long haul

Tesla and Ford stock have both sold off and could keep selling off in the short term due to a mix of industry headwinds and broader market volatility. Investors interested in the EV space should approach a prospective investment with a long-term time horizon. Tesla has come far, but is still a long way from maturing into the company it hopes to become.

Similarly, Ford is in the early innings of its EV transition. The investment thesis for both companies will take time to play out. For that reason, it could be a good idea to simply dollar-cost average into stocks you like over time and keep a basket of electric car stocks in your portfolio to ensure that any single company's failures don't wreak havoc on your financial health.