Ford vs Tesla: A Tale of Two Car Companies
What happens when a 100-year-old company tries to reinvent itself? Many investors are pondering this question as Ford Motor Company (NYSE:F) tries to challenge Tesla Inc (NASDAQ:TSLA) on autonomous cars. There is a lot of uncertainty, to be sure, but the Ford stock price may end up advancing at the expense of Tesla stock. It’s not a crazy idea.
Let me explain.
Psychology is a big part of investing. For instance, when it comes to driverless technology, the market expects less from F stock than it does from TSLA stock. Why? Because Henry Ford founded his car company in 1903, which makes Ford an “old company” by technology standards.
“Old” is basically a death sentence in tech, because investors interpret it to mean unimaginative, complacent, and slow. They have a bias towards newness.
They don’t think that crusty firms like Ford can compete in the modern era. Or, to be more specific, they don’t think the Fords of the world can out-innovate the Teslas. After all, Tesla was forged in the competitive fires of Silicon Valley; Ford was born before World War I. So obviously TSLA stock is better than F stock, right?
That’s the perception: Ford is the past and Tesla is the future.
There is a juicy trade to be made on this psychology. Think about it: investors have high expectations for Tesla stock. At the same time, they have low expectations for Ford stock.
This means that Ford will be more sensitive to the upside. All it has to do is beat some measly analyst estimates and, voilà, the stock will surge. Meanwhile, Tesla is expected to reinvent the wheel at every turn. Build an electric car. Make it cheaper. Reduce battery prices … it goes on and on and on.
There are a million things that investors are looking for from Tesla, which makes it that much harder for Tesla to beat estimates. That’s why we’ve seen the share price struggle to break past $280.00 over the last five years. Take a look at the chart below:
Chart courtesy of StockCharts.com
Don’t get me wrong, I still think Tesla stock is a good investment. CEO Elon Musk has a long record of overcoming pessimism; he squashes Tesla bears on a regular basis. It’s reasonable to believe that he can beat the odds again, but Ford’s investment in autonomous cars is dangerous.
I know this doesn’t fit the conventional narrative of Ford. No one really imagines that one of the oldest carmakers in the world can still deliver enormous gains to shareholders. Nonetheless, that’s what we might see in 2017. Ford stock is poised for enormous growth.
It all comes back to market psychology. Because no one expects old carmakers like Ford to innovate as quickly as Tesla, there is a much higher chance that Ford stock could surge in 2017.
If you’re still skeptical, just take a look at what the company has been doing in recent months. Ford is gearing up to enter the driverless car race. In fact, it recently invested in an autonomous car startup called Argo AI. The price tag? Oh, just a casual $1.0 billion.
Ford Is Dead Serious about Autonomous Cars
In mid-February, Ford announced that it would invest $1.0 billion over five years in a company called Argo AI. No one had ever heard of this company. It was only a few months old. However, the co-founders of the startup had a lot of experience in driverless technology.
One of them used to work at Uber Technologies Inc. and the other hailed from “Waymo,” Alphabet Inc’s (NASDAQ:GOOG) self-driving project.
Alphabet (formerly known as Google) was the earliest pioneer of autonomous cars. It basically put driverless tech on the map, which is why its engineers have more experience with driverless technology than anyone else on the planet. They are simply more experienced.
One of Google’s senior engineers founded Argo AI. He followed the five-step game plan for getting rich in Silicon Valley. Here’s how it goes:
- Work at a major tech company.
- Become an expert in an emerging technology.
- Quit your job.
- Launch your own startup based on that emerging technology.
- Get bought out by your old employer’s rival.
When Ford bought Argo AI, it was basically an acquisition-hire, or “acqui-hire,” as it’s known in the industry. What it wanted was expertise in driverless tech. Since Google’s old staff are often the most qualified to run an autonomous cars program, Ford decided that $1.0 billion was fair. It’s a small price to pay, considering the effects it could have on Ford stock.
We see this sort of thing happen all the time in Silicon Valley. It isn’t a coincidence. Judges in California don’t enforce non-compete clauses, which gives employees all the power. If they have a unique set of skills or highly prized knowledge, they can jump ship at a moment’s notice.
Look at the recent acquisitions within the driverless technology sector:
Driverless Tech Startups – Acquisition History
Founders’ Previous Employer
|Ford Motor Company|
|General Motors Company|
|Uber Technologies, Inc.|
(Source: “Ford is putting $1 billion into an AI startup, Detroit’s biggest investment yet in self-driving car tech,” Re/Code, February 10, 2017; “Here’s why Toyota is spending $1 billion on AI in Silicon Valley,” Fortune, November 6, 2015.)
There’s a lot of money to be made if you have the right programming skills. That being said, Ford and GM aren’t blowing cash for no reason. They have accepted that autonomous vehicles are the future. Pouring money into that technology might be costly, but it’s their way of staying relevant. Coincidentally, it could also spark an explosion in their Ford stock and GM stock.
Why Ford Stock Could Be a Better Bet than Tesla Stock
Car companies have typically aimed low. They wanted to build cars the same way they’ve always built them, and then sell them at a small profit. Margins are notoriously thin in this business, but the carmakers didn’t care. They had an ironclad grip on the market.
Then Tesla disrupted their peace.
Elon Musk took a sledgehammer to the entire business model of car manufacturing. He built enormous factories that run on automated machines, established Tesla-owned dealerships, and incorporated the latest technologies into his cars. He gave the industry a vision of the future.
But here’s the problem: Ford and GM are now imitating that vision. They are following Tesla down the rabbit hole, yet holding on to the enormous advantages they’ve always had: size, stature, and an ability to produce at scale. These are not insignificant advantages.
Since all the carmakers are headed in the same direction (driverless, fleet learning, car sharing), you would expect their stock prices to be equally expensive. However, this is far from true. Tesla’s price-to-earnings ratio—a way of measuring a stock’s potential—is four times higher than Ford’s, and seven times higher than GM’s.
Here’s what would happen if the P/E ratios leveled out:
Chart courtesy of StockCharts.com
This chart would probably have industry experts clutching their pearls, but the logic is straightforward. Tesla stock is valued at 44.24 times past earnings because of its investments in autonomous cars. That bet could pay off big-time, so investors are right to be bullish on TSLA stock.
But now that Ford and GM are doing the same thing, shouldn’t we be equally bullish on them?
Conclusion: Ford Stock Could Win This Fight
The answer seems obvious. Yes, we should be bullish on the Ford stock price, because it could mirror the rise of TSLA stock four years ago. The company is making a sincere attempt to innovate, and it has hired the talent necessary to get it done. On top of those initiatives, Ford is an established automaker with the ability to scale.
Based on everything we’ve seen, this is more than a cosmetic appeal to investors. Ford already partnered with Uber to test out the driverless capabilities of several “Ford Fusions” and, by all accounts, the experiment went very well.
Only market psychology is weighing down the stock. But, as stated earlier, there is a very low bar for Ford to “beat estimates.” A much lower bar than there is for TSLA stock. Investors will start to notice Ford stock once it has topped expectations for a few quarters, so keep an eye on this issue. It is moments away from taking off.