5x More Likely First: Tesla vs Ford?

Electric vehicles (EVs) will be one of the great secular growth stories of the decade. BloombergNEF researchers predict that annual unit volume for plug-in EVs will grow from 6.6 million in 2021 to 20.6 million in 2025. Considering how much a new car costs, this is a trillion-dollar revenue opportunity for the company to pursue. That’s why so many automakers — from EV pioneers Tesla (TSLA -0.89%) for beginners like Rivian for old car makers like wade through (F -1.85%), Volkswagenand Toyota — invested so much money in their EV product line.

But which stocks among these automakers provide the best investment opportunities at current prices? Let’s take a look at the two key players — Tesla and Ford — and identify which stocks are likely to go up 5x in the shortest period of time.

Image source: Getty Images.

Tesla: EV Pioneer

You may know Tesla as the company that has been driving the EV revolution for the last 10 years. With four models currently on sale and several more in development, Tesla is the EV leader in many important markets around the world. By 2021, the company delivered 936,000 vehicles to customers and has been increasing its production capacity at a rapid rate over the past decade.

Last year, the company reported $53.8 billion in revenue and $6.5 billion in operating income. With $17 billion in cash propping up the balance sheet, investors are betting that Tesla can capture the bulk of its projected annual EV sales, pushing annual shipments into the millions.

Tesla is also betting on self-driving technology, solar energy, and the deployment of battery storage. However, it is difficult to predict how much financial value this segment will provide given that solar/battery storage has negative gross margins at the moment, as well as uncertainty surrounding full self-driving technology, which many researchers believe is years away. For now, it might be smart for investors not to include this division when valuing Tesla stock.

As of this writing, Tesla has a market cap of $730 billion, one of the largest in the world. Tesla stock has a price-to-sales ratio of around 14 and investors are already expecting a lot of growth over the next few years. For the stock to take 5x to a market cap of $3.65 trillion, Tesla will have to exceed investors’ high expectations.

Ford: Making the EV transition

Unlike Tesla, Ford is a legacy automaker that still makes most of its sales from cars with internal combustion engines (ICE). Over the next decade, the company plans to invest heavily in EV operations, with $50 billion in planned spending from now through 2026. According to management, this will allow the company to reach 600,000 in annual EV production capacity next year and 2 million in 2020. front. 2026. Looking at Tesla’s finances by comparison, this could mean more than $100 billion in EV sales for Ford if it could carry out this goal.

To do so, Ford has a formidable lineup of EVs, including the Mustang Mach-E, F-150 Lightning, and the E-Transit commercial van. There’s a lot of uncertainty, as the company hasn’t put many vehicles on the road yet. But as with Tesla and other automakers, with so many new sales to come, there’s a huge financial opportunity here.

As of this writing, Ford has a market capitalization of $54 billion and $29 billion in cash and equivalents. For the stock to be 5x, investors would need to value Ford at a market cap of $270 billion, or less than 10% of Tesla’s value to achieve the same jump.

Math problems

I think it’s clear that Ford is more likely than Tesla for 5x, simply because Tesla’s stock is rated so rich. If Ford is able to hit $200 billion in annual sales after increasing EV production and increasing its operating margin to 15% (which is close to Tesla), the company will generate $30 billion in operating income by 2026. Using a typical revenue multiple for 10 automakers, that equates to market cap of $300 billion, which is over the 5x hurdle.

Now let’s do the same calculation for Tesla. To reach a revenue multiple of 10 at a market cap of $3.65 trillion (5x the hurdle of Tesla’s stock), the company would need to generate $365 billion in operating income a year. Assuming an operating margin of 15%, this would require more than $2.4 trillion in annual sales. Achieving a 5x jump doesn’t seem far-fetched unless you think investors will continue to value Tesla with much higher multiples of earnings than the rest of the industry.

I don’t think either Ford or Tesla will be 5x in the next five years. But if I had to bet on one stock to do this, it would be Ford, just because of the initial assessment.

Leave a Comment