Ford Motor Company (NYSE:F) is one of the oldest car companies in the United States. This long-running company founded by Henry Ford revolutionized large-scale manufacturing and put Detroit, Michigan on the map as an automaking powerhouse.
But this decade started with a bang for Tesla Inc (NASDAQ:TSLA) – this media darling rose to prominence over the past ten years by making electric vehicles a reality and soared in recent years. It joined the prestigious S&P 500 and disrupted the industry with a new business model.
To the astonishment of industry observers, it’s become the most valuable car company in the world with a market capitalization nearly 20 times that of its older rival.
If you want to invest in American auto manufacturing, which is better between Ford stock vs Tesla?
Ford may have lost its lead in the American automobile market, but it has plenty of gas left in its tank. The company reintroduced its infamous Bronco and redesigned its Mustang to attract younger drivers. Meanwhile, Tesla is building more than cars – it’s trying to build the charging stations too.
Which will win the race while the other takes a pit stop? It’s time to look under the hood.
Is Ford Stock A Buy?
Ford got hit hard by the coronavirus pandemic, dropping from a 52-week high of $9.57 per share to $3.96 at the crash low.
It was slow to recover that value and couldn’t sustain $7.00 per share until October. That’s when the industry typically releases new models.
Of course, the economic crash slowed releases down. The 2021 F-150 was the first to ship to dealers as the 2020 model’s sales dropped by nearly half.
Despite slumping car sales across the board in 2020, Ford reported $38 million in revenue in the third quarter. This is an increase from the $37 billion in made the prior year. This caused it to raise its 2020 earnings estimates and draw investor interest through year end.
The company typically pays a cash dividend, although it was suspended when cash flows became a concern due to declining sales.
Ford’s dividend yield of $0.15 per quarter hasn’t been raised since 2015, but it did offer one larger payment each year through 2018 to make up for it.
Still, Ford is an iconic American brand that still draws fans. One wonders if it’s even on the table for a buyout by Tesla.
Tesla Valuation Is Eye-Popping
Tesla defied all odds after going public in a June 2010 IPO. At the time, its common stock sold for $17.00 per share. In August 2020, the stock underwent a 5-for-1 split and within months was trading at over $700 per share. It eclipsed the combined value of all other auto manufacturers while posting just a tiny fraction of the profits.
By November, shares surged as it became clear the company would be included in the S&P 500.
The company’s almost $700 billion market cap resulted in a jaw-dropping P/E ratio over 1,275x. It’s astronomical compared to Ford’s 20x-30x P/E ratio range. The company’s third quarter 2020 revenue was $8.77 billion, on which it earned $331 million.
It marks the company’s fifth straight quarter of profitability though. That’s something startups like Uber (UBER) still can’t do.
That’s because the company has multiple revenue streams, including all-electric vehicle manufacturing, distribution, sales, and service. It also creates the batteries used in both its cars and homes, and its solar unit is working on new innovations in rooftop solar power generation.
But is that enough to justify its premium price?
Ford Stock Under Threat From Tesla
Ford has a lot of debt – it ended 2019 with $37 billion in cash heading into the economic car crash. By June, the company’s debt sat at $175.2 billion. This is up from $155.9 billion in the same quarter of 2019. It’s not a good sign for investors.
Making things worse – Tesla CEO Elon Musk expressed desire to buy a legacy automaker in December 2020. It could leverage its historic high market capitalization to easily purchase the company and renegotiate its debt.
And people are holding onto their cars longer. Vehicle sales dropped by 20 percent in 2020, and Ford is fighting both Tesla and traditional automakers around the globe for bigger portions of a smaller market. It could be years before auto sales return to former high levels.
Ford also struggles to get the Bronco out to dealerships to be sold. It spent part of the last year using its facilities to manufacture respirators and masks. Suspended manufacturing put it behind in all its development and releases, and it may need NOS to get back into the race.
Tesla Valuation Makes Investing Risky
Tesla bears rang alarms throughout 2020 as its stock price soared beyond $700 per share yet some bulls labeled it a Buy as high as $750 per share.
The company has $14.1 billion in long-term debt to pay off itself. It has a lot of expensive infrastructure builds to make before it can truly compete with legacy automakers.
It needs to buildout more factories and increase its manufacturing capacity, which it may need to buy an existing automaker to accomplish.
Musk can also be a liability for the company. He regularly makes headlines that often affect the stock’s price, regardless of whether it involves the company or products. His divisive anti-quarantine comments also stigmatized his core audience.
Tesla is a buzzworthy company with lofty ambitions. So far, it’s accomplishing them, but its luck could run out. It’s no longer the only EV company on the block. Legacy brands are releasing all-EV and hybrids while startups try to steal the company’s lane in large trucks, vans, other enterprise vehicles.
Tesla Vs Ford Stock: The Bottom Line
Ford and Tesla are the respective Boomers and Millennials of the automotive stock market. One is a legacy brand that once led the industry with solid manufacturing principles and drool-worthy designs. The other reinvented the wheel by replacing gas engines with electric.
The problem is that Tesla’s P/E ratio is so jaw-droppingly high that it’s very challenging to justify and makes any other automaker seem like a sweet deal. Auto sales are stagnant in 2020 and could remain so in 2021 amid economic uncertainty. Even in a buyout scenario, Ford investors are likely to make out better than Tesla’s.
We’re at the precipice of EV’s takeover of traditional gasoline vehicles. Be sure to perform due diligence before investing your hard-earned money.
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