Ford Motor Company (F 0.62%) is an old dog learning new tricks. The company at the forefront of the American automotive industry is building an electric vehicle business after Tesla successfully brought the technology to the mainstream consumer.

But progress isn't free, let alone cheap. Ford is investing billions in developing and manufacturing EVs, and has split the company into separate reporting segments to give investors a peak behind the curtain.

Electric may be the future, but Ford's transition period has become a bumpy ride that may keep the stock from performing for a while. Here is what investors need to know.

Ford's electric vehicle start-up

Ford named its electric vehicle business Ford Model e, and in reality, investors should look at it as a start-up company. Ford sells the Mustang Mach-e and F-150 Lightning primarily as its two headline products, but has plans to electrify most of its existing fleet within this business segment.

The segment is experiencing production growing pains just like Tesla once did and as competitors like Rivian Automotive are seeing now. The issue is that factories, marketing, and engineering all cost a lot of money, which Ford must offset by selling many vehicles. But the production doesn't start high -- instead, it ramps up slowly, meaning Ford is losing a lot of money right now.

Ford Model e segment performance as of Q1 2023.

Image source: Ford Motor Company.

You can see that Ford Model e's losses have grown over the past five quarters. The segment sold 12,000 vehicles in Q1, losing $700 million. That is a loss of $58,333 per vehicle, a margin of negative 102% for the quarter!

Management blamed scheduled downtime for the drop in volume, but you can see that Ford is far from the production levels needed to generate profits in this business. Investors should look for EBIT (earnings before interest and taxes) to peak and begin declining as production grows moving forward.

Dragging down the bottom line

Ford is using the profits from its legacy auto segment, which it now calls Ford Blue, to fund its EV business, Model e. That's fine, but it's taking a chunk out of its bottom line. Ford as a whole made $3.4 billion in EBIT in the first quarter, so the $700 million lost on Model e is a notable headwind to profits.

Looking at earnings-per-share (EPS), Model e has become an anticipated drag on Ford's earnings growth. You can see below that analysts have steadily lowered forward-looking expectations for earnings growth, and are now expecting profits to shrink.

F EPS LT Growth Estimates Chart

F EPS LT Growth Estimates data by YCharts

Ford is transitioning to EVs out of necessity, so while it's not necessarily Ford's fault, the economic environment is arguably a case of bad luck. High inflation and rising interest rates have pushed the U.S. economy toward a potential recession. At the same time, Ford is struggling to keep costs for its EV under control, raising the entry-level price of the F150 Lightning from $41,000 to nearly $62,000 in just a couple of years.

Meanwhile, Tesla is cutting costs on its models, something that Ford's CEO cautioned is a worrying trend.

What should investors do?

Ford's stock looks really cheap today; the forward price-to-earnings ratio (P/E) is just 6, far lower than that of the broader market, which trades around 18 times earnings. But if Ford's EV investments shrink its profits, the stock could get more expensive over time, not less.

F PE Ratio (Forward) Chart

F PE Ratio (Forward) data by YCharts

In a way, the Model e segment is the reason to like Ford over the long term, but also the reason you should avoid the stock for now. There could be several years of growing pains ahead, and investors might be wise to wait for incremental EV unit growth, peaking losses, and a better economic environment. An improved situation would be more accommodating to Ford's financials and your portfolio.