Is This Legacy Automaker A Better Pick Than Tesla Stock?

Ford (NYSE:F) and Tesla (NASDAQ:TSLA) are perhaps two of the best-known American automotive brands. Tesla is now the world’s most valuable automaker by far, valued at about $780 billion, or 19x trailing revenues, as investors are betting that the company’s early mover advantage in the electric vehicle (EV) and self-driving space could make it a dominant player in the future of transportation. In contrast, Ford, which has seen little growth recently, but is seeing its EV plans gain traction, is valued at just about $60 billion, or just about 0.4x trailing revenue. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth and operating margin growth. Tesla vs Ford Motor: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Tesla Is Growing Fast, While Ford’s Sales Have Declined

Tesla, with revenue of $42 billion over the last 12 months, remains smaller compared to Ford, which posted sales of close to $129 billion over the same period. However, Tesla’s growth has been much stronger, with revenue rising by about 98% over the most recent quarter. While this was driven in part by a favorable comparison with Q2 2020, when the Covid-19 related lockdowns slowed down production and deliveries, Tesla is also benefiting from the scale-up of sales of new models, higher production at its facility in Shanghai, and Tesla’s success in navigating the ongoing semiconductor supply crunch. In comparison, Ford’s sales rose by just about 6% over the most recent quarter, as the company’s post-Covid recovery is being hurt by the semiconductor shortage. Looking at a longer time frame, Tesla’s revenues have risen at a compounded rate of about 39% over the last three years. On the other hand, Ford’s revenues have actually declined at a compounded rate of -6.7% over the last three years.

Looking ahead, Tesla revenues are estimated to grow 55% y-o-y in fiscal 2021, to about $49 billion, per our estimates, while growing to over $65 billion in 2022. On the other side, we expect Ford revenues to rise by about 11% to about $142 billion in FY’21 and by about 4% to about $147 billion in FY’22. Now Ford is doubling down on the EV market, with plans to invest about $22 billion in electrification through 2025. However, we don’t expect this transition to drive meaningful long-term growth for the company, as the auto market is only likely to get more competitive as the barriers to entry into the EV space are quite low.

2. Tesla Set To Emerge The Clear Margins Leader

Ford’s operating margins stood at about 3% over the last twelve months, with margins declining by about -3.6% over the last three years, partly due to the Covid-19 disruption. In comparison, Tesla’s operating margins stood at 7.9% over the last three months.  Tesla’s margins have also been improving, rising by 8.1% over the last three years.

We also think Tesla’s margins have a lot more scope for improvement. The company is already among the most profitable companies in the auto industry on a gross margins basis. Its automotive gross margins stood at almost 26% over the most recent quarter, excluding regulatory credit sales (versus margins of under 10% for the broader auto and truck space), due to its focus on premium vehicles, its direct sales model, and its increasing mix of software sales. ^[1] As revenues scale up and fixed cost absorption improves further, Tesla margins are likely to see further gains. While Ford’s margins should also recover a bit, as volumes eventually pick up and supply chain constraints are eased, we think Tesla will remain the clear margins leader in the longer term.

The Net Of It All

So Tesla’s margins performance, revenue growth, and overall recent execution have been solid versus Ford. That being said, Tesla trades at about 19x trailing revenues and is now valued at $780 billion, that’s almost 3x that of Toyota, the next largest automaker. This rich valuation makes sense if you believe that the company’s massive self-driving leadership, and its early mover advantage in the EV space will make the company the dominant player in the future of transportation.

Ford, on the other hand, trades at just 0.4x trailing revenue. While the company’s growth rates and profit potential are below Tesla’s, its valuation is appealing. If Ford is able to execute well on its EV transition and deliver a compelling, well-received EV, this could cause investors to re-rate the stock higher, leading to stronger returns.

1. Margins by Sector, NYU Stern [↩]