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The bear market of 2022 has hammered stocks in many sectors. Even after a strong October comeback, S&P 500 the index is still down nearly 19% year to date. Technology focused Nasdaq Composite has gotten even worse, with 2022 losses of almost 30% through October.
This makes it a good time for investors to decide whether there are bargains to be had, and the growing electric vehicle sector is one place to consider. Tesla (TSLA 0.12%) and Ford (F 0.22%) are at different stages of supplying this emerging market, but both stocks are down about 35% this year. There are different risks involved in investing in these names, but with the stock down now is a good time to consider which is the better buy.
Image source: Tesla.
Can Ford catch Tesla?
Ford has no plans to go all-in with EVs, but is still focusing on the segment for now. Now the “No. 2 electric brand in the U.S.,” Ford nearly tripled U.S. electric vehicle sales year over year in September and ended the quarter with more than 18,000 units sold, the company said in its third-quarter conference call with investors. But more than 200,000 electric cars were sold domestically in the third quarter, according to Cox Automotive. So it is clear that Tesla still has a dominant position.
But Ford plans to spend $50 billion to grow its Model e electric vehicle segment, which now offers the F-150 Lightning, Mach-E and E-Transit utility vehicles. Ford is also complementing its Model e division with legacy internal combustion engine (ICE) vehicles and a third segment for business and government customers. The Ford Pro company supplies both ready-to-run ICE and hybrid electric products. Starting next year, it will report the results of each segment separately under the Ford+ corporate umbrella.
Tesla also has additional businesses including autonomous driving technology, battery manufacturing, solar power and energy storage. This vertically integrated approach to its core EV business has led to Tesla’s high profitability and should be the focus of investors.
Difference in profit margin
The third quarter produced a marked contrast between the two companies. Tesla reported $3.3 billion in net income and free cash flow. This has brought its net profit for the last 12 months to more than $11 billion. Ford, meanwhile, swung to a net loss for the quarter after writing off $2.7 billion in preparation for the shutdown Argo AIa subsidiary of Autonomous Management, in which it originally invested in 2017. Ford’s move away from driverless vehicles is another contrast to Tesla’s continued direction.
That was a non-cash charge, however, and Ford still reported $3.6 billion in adjusted free cash flow for the quarter. It expects full-year free cash flow of up to $10 billion. But that money doesn’t give investors the same returns as Tesla because of the difference in operating margins.
TSLA Utilization Margin (TTM) data by YCharts.
What is important to investors
Two things should be most important to investors – profitability and valuation. These two metrics largely determine ROI. Tesla has proven that it can be more profitable than traditional car manufacturers. But the valuation remains a concern for potential investors. The growth potential of its electric vehicles — management expects 50% annual production growth for several more years — and its energy and autonomous driving segments have sent shares soaring in recent years.
Tesla’s price-to-earnings (P/E) ratio remains close to 70, based on cumulative earnings per share of $3.32 over the last four quarters. That means its stock may not go anywhere for several more years as Tesla’s business results catch up. evaluation. But for investors looking years or even decades ahead, Tesla still looks like a worthwhile investment.
While Ford’s P/E looks low in the single digits, many questions remain. It makes more sense to have a proven, profitable and growing company than a transition period that may not yield returns on large investments that still need to be made.
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