Tesla (TSLA -3.40%) has been in the news lately due to its tumbling stock price and the public's criticism of CEO Elon Musk's purchase and handling of Twitter. While folks can go back and forth regarding the Twitter deal's actual effect on the electric car stock, there's no denying that the bigger story is a challenging auto industry.
Tesla stock is down 66% from its 52-week high. Meanwhile, Ford Motor Company's (F 6.10%) and General Motors' (GM 1.98%) stocks are down 49% and 38%, respectively, from their 52-week highs.
When deciding which might be the better buy for 2023, it can be helpful to do a comparison. Here's the case for buying Tesla as well as the argument for buying a 50/50 split of Ford and GM instead, as outlined by two Motley Fool contributors. Let's see if we can get any insight into which is the better investment option.
Image source: Getty Images.
Volatility aside, Tesla has a lot to offer
Daniel Foelber (Tesla): Tesla has long been seen as a battleground stock between those who believe in its technology, leadership, and vision -- and those who question its execution and the stock's valuation. Tesla isn't the same company it was five years ago. In fact, there's every reason to believe that neutral investors can approach Tesla and find value, instead of it being an all-or-nothing case "for" or "against" the company.
For starters, electric vehicle (EV) investing is now widespread. Virtually every major automaker (Ford and GM included) is implementing multi-billion-dollar emissions reductions and EV investment strategies to compete in a greener world. Tesla deserves a lot of credit for this widespread strategic shift among legacy automakers. While the trend toward EVs does mean increased competition for Tesla, it also normalizes EVs and could even accelerate industrywide improvements down the road, as competition tends to benefit innovation.
Additionally, Tesla is now a consistently profitable company that generates a high amount of free cash flow. And the much lower stock price means that Tesla simply doesn't sport a nosebleed valuation anymore. In fact, its forward price-to-earnings ratio was roughly in line with consumer staples stocks like PepsiCo and McDonald's at the start of 2023, even though Tesla has far faster growth than these companies.
Finally, Tesla was added to the S&P 500 in December 2020. It's currently the second largest stock by market cap in the consumer discretionary sector (behind Amazon). So, love it or hate it, Tesla's now a core part of the American economy via S&P 500 index funds, thematic funds, and sector-focused exchange-traded funds.
Given its potential in EVs, automation, robotics, artificial intelligence, and renewable energy, Tesla is an exciting company with a lot to offer for a diversified portfolio. But it's also a highly volatile, borderline irritating stock to own, given the media coverage and drama that comes with the territory. For that reason, investors must know what they're getting into before buying Tesla -- even if the risk/reward has never looked better.
Better value for now
Howard Smith (Ford, General Motors): There's no doubt that Tesla has a lot to offer, but the potential outperformance it offers for investors from here could be years away. Investors should be buying stocks now, looking ahead to the future, so there's nothing wrong with that. But with Ford and GM ramping up their EV offerings, now could be an excellent time to take advantage of their value proposition.
While Tesla shares have plunged over the last year, its valuation is still multiple times higher than both Ford's and GM's. This is the time when the massive investments in EVs made by traditional automakers should start to pay off. Even if Tesla sales continue to grow at an annual rate approaching 50%, its price-to-sales (P/S) ratio will remain many times higher than both Ford's and GM's for years to come.
TSLA PS Ratio data by YCharts
And this is at a time when Tesla is cutting vehicle prices to hold on to its leading EV market share, while Ford and GM are adding a more diverse product lineup for that market. EVs made up just 10% of all global new car sales last year, so there looks to be plenty of growth ahead to support the various types of vehicles being brought to market.
Tesla may be diversifying into electric heavy trucks and its unique Cybertruck model, but those offerings pale in comparison to the mix the new entrants in the market are offering. Ford's growing sales with its F-150 Lightning and Mustang Mach-E SUV, but it's also already embedded in the commercial van market. It has a new E-Transit van which is already the top-selling electric van in the U.S.
Ford also plans to continue offering internal combustion engine vehicles for customers who don't want to transition to electric vehicles. GM will bring dozens of new electric models to market in the coming years. The billions poured into EV-related investments will finally begin bearing fruit for those automakers. While Tesla may be a great aggressive investment for very long-term plans, Ford and GM look like a better value now for those looking at the three- to five-year time frame as the new products gain traction.
Worthy considerations for an EV basket
Tesla, Ford, and GM are three very different automakers that may appeal to different investors. Tesla offers the most growth potential, but it also has to sustain a high growth rate to justify its current valuation.
Meanwhile, Ford and GM have a lot of debt, whereas Tesla has a net cash position on its balance sheet. But Ford and GM are much cheaper stocks, with GM offering arguably the most diversified product and the best value. Ford is more focused on the pickup truck market and EVs -- but its stock also has a 4.8% dividend yield, compared to 1% for GM.
All three American automakers could deserve a place in a diversified portfolio. However, it's worth remembering that the short-term outlook for automakers in a rising interest rate environment and going into a potential recession is cloudy. An investment in any of these stocks should be based on the belief that their long-term growth plans will pay off.
