Ford Motor (F -0.80%) often takes the backseat to larger rivals like Tesla and General Motors, which dramatically exceed their sales volumes and market caps. The company's stock has also historically been a somewhat lackluster investment, with its price barely budging over the last 30 years.
But Ford's management hasn't been asleep at the wheel as the company seeks to carve out a niche for itself in the fast-growing market for electric vehicles (EVs). Let's discuss whether or not these efforts will be enough to overcome all the automaker's challenges.
A business in flux
Ford is a business in transition. Since 2018, its management has embarked on a massive global restructuring designed to streamline the company by focusing on the most profitable opportunities. This process has involved exiting underperforming markets, cutting thousands of redundant positions, and discontinuing lower-margin product lines, such as sedans, in favor of trucks and SUVs.
In 2022, Ford took things a step further by splitting its automotive business into three separate units: Ford Blue (traditional gas and diesel-powered vehicles), Ford Pro (fleet ad commercial vehicles), and Ford Model E, which will focus on EVs. According to CEO Jim Farley, the decision to separate the EV segment could help the company foster the "culture and the intensity of a high-tech start-up" while benefiting from the scale, distribution networks, and cash flow of the traditional business.
But while EVs are making up an increasingly important part of Ford's overall strategy, the transition hasn't been all smooth sailing.
A massive market opportunity
According to research from Goldman Sachs, EVs will represent 61% of global car sales by 2040. This number rises to a whopping 85% in Ford's home market, the U.S.
The trend suggests car companies must quickly pivot to EVs or could cease to exist. Those companies that take the opportunity more quickly could enjoy market-share gains at the expense of laggards.
While Ford is nowhere near Tesla, which accounted for 64% of EV registrations in the U.S. market, it came in second place with a 7.5% market share. It could also use its popular brands, like the Mustang Mach-E or the F-150 Lighting, to gain ground.
But as competition rises in the EV market, Tesla is resorting to increasingly aggressive strategies to maintain its dominance. According to Reuters, the market leader cut prices globally by around 20% at the start of 2023. It also believes it can reduce production costs on its next-generation vehicles by 50% -- further upping the ante.
The price war could start to bite
Image source: Getty Images.
Ford's first-quarter earnings demonstrate the divergent performance in its three different segments. While overall revenue jumped 20% year over year to $41.5 billion, it was driven by expansion in Ford Blue and Ford Pro. The electric-vehicle segment, Ford Model E, had a more difficult time, with its revenue falling 27% to $700 million and negative earnings before interest and taxes (EBIT) of $722 million.
Management says the underperformance is due to higher engineering costs, inflationary pressures, and temporary manufacturing bottlenecks with popular EV models. But CEO Jim Farley is also worried about competition. In April, he warned that Tesla could start a price war that turns certain electric vehicle models into commodities. Tesla's mass market strategy could become a problem for Ford because its Mustang Mach E competes with the Tesla Model Y crossover, and Tesla will soon enter the pickup truck market with its Cybertruck expected to launch this year.
Is Ford stock a buy?
Ford faces significant challenges as it attempts to scale up its unprofitable EV business in the face of stiff competition from Tesla and other manufacturers. But its dirt cheap valuation more than makes up for the uncertainty. With a price-to-earnings (P/E) multiple of just 7.26, the stock trades for a fraction of the S&P 500 average of 24 or the EV leader Tesla, which trades for 42 times earnings.
Ford stock remains an affordable way to bet on the U.S. EV industry, but investors will have to be patient while waiting for its new Model E segment to reach its full potential.
