More likely to 5x first: Tesla vs. Ford?

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Two men in suits face off against each other in a boing ring.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Electric vehicles (EVs) will be one of the large secular growth stories of this decade. BloombergNEF researchers estimate that annual unit volumes 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 companies to go after.

That is why so many automakers — from EV pioneer Tesla (NASDAQ: TSLA) to upstarts like Rivian to legacy automakers like Ford (NYSE: F), Volkswagen, and Toyota — are investing so much money in their EV product lines.

But which stocks among these automakers provide the best investment opportunity at current prices? Let’s look at two key players — Tesla and Ford — and identify which stock looks most likely to 5x in the shortest time period.

Tesla: The EV pioneer

You probably know Tesla as the company that has driven the EV revolution over the past 10 years. With four models currently for sale and a few more in development, Tesla is the EV leader in many important markets around the world.

In 2021, the company delivered 936,000 vehicles to customers and has grown 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 shoring up its balance sheet, investors are betting that Tesla can capture a good chunk of the projected bump in annual EV sales, driving its annual deliveries into the millions.

Tesla is also making bets on self-driving technology, solar energy, and battery storage deployments. However, it is difficult to estimate how much financial value these segments will provide considering solar/battery storage has negative gross margin right now, as well as the uncertainty around full self-driving technology, which many researchers think is years and years away. For now, it is probably smart for investors to not include these divisions 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 trailing price-to-sales ratio around 14 and investors are already pricing in a lot of growth over the next few years.

In order for the stock to 5x to a market cap of $3.65 trillion, Tesla would need to greatly exceed investors’ high expectations.

Ford: Making the EV transition

Unlike Tesla, Ford is a legacy automaker that still makes the majority of its sales from cars with internal combustion engines (ICEs).

Over the next decade, the company plans to invest heavily in EV operations, with $50 billion in planned spending from now until 2026. According to management, this will enable the company to get to 600,000 in annual EV manufacturing capacity next year and 2 million by 2026.

Looking at Tesla’s financials as a comparison, this could translate into over $100 billion in EV sales for Ford if it can execute on these objectives.

To do so, Ford has a robust lineup of EVs, including the Mustang Mach-E, F-150 Lightning, and E-Transit commercial van. There is a lot of uncertainty, though, as the company has not gotten many vehicles out on the road.

But like with Tesla and the other automotive manufacturers, with so many new sales to go after, there is a gigantic financial opportunity here.

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

A matter of math

I think it is clear that Ford is more likely than Tesla to 5x, simply because Tesla’s stock is valued so richly.

If Ford is able to hit $200 billion in annual sales after ramping up EV production and raise its operating margin to 15% (which is close to Tesla’s), the company would be generating $30 billion in operating income by 2026.

Using a typical earnings multiple for automakers of 10, that equates to a market cap of $300 billion, which clears the 5x hurdle.

Now let’s do the same calculation for Tesla. In order to hit an earnings multiple of 10 on a market cap of $3.65 trillion (Tesla stock’s 5x hurdle), the company would need to be doing $365 billion in operating income a year.

Assuming an operating margin of 15%, this would require over $2.4 trillion in annual sales. Achieving a 5x jump does not seem reasonable unless you think investors will perpetually value Tesla at an earnings multiple much higher than the rest of the industry. 

I don’t think either Ford or Tesla will 5x within the next five years. But if I had to bet on one stock doing this, it would be Ford, simply because of the starting valuation.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

The post More likely to 5x first: Tesla vs. Ford? appeared first on The Motley Fool Australia.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla and Volkswagen AG. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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