The shares of Ford Motor Company (NYSE:F) have gotten off to a inauspicious start this year, down about 7%. Unfortunately, this kind of performance has been the norm for some time. Since the summer of 2014, F stock has lost about 37% of its value.
Yes, it’s been an awful ride. But then again, with its price-earnings ratio at a rock-bottom seven times forward earnings and a hefty dividend of 5.3%, could Ford stock be a value play?
These factors typically make for a value play, for the most part. Yet despite this, I advise caution, as F stock still has some major challenges. Let’s take a look:
Ford Stock Issue #1 – Scale
Having massive global scale has always been critical for the auto industry. Let’s face it, the capital costs are enormous. This is why most startups in the industry have failed, with only a few notable exceptions like Tesla Inc (NASDAQ:TSLA). Yet scale may be even more important nowadays.
According to Fiat Chrysler Automobiles NV (NYSE:FCAU) CEO Sergio Marchionne, an auto manufacturer needs to sell 15 million vehicles a year to remain competitive. A big part of this is the need to keep up with the demands for new technologies.
Considering this, it should be no surprise that Marchionne wants to merge with rival GM. (Note that his company delivers about 4.7 million a year globally.)
As for Ford? Unfortunately, the volume is also relatively low, with 6.65 million deliveries last year. So unless the company seeks out a merger partner, it could be tough to keep up with the mega operators in the industry.
Ford Stock Issue #2 – Technology Disruption
Technologies like cloud computing and artificial intelligence (AI) are rapidly changing the landscape of the auto industry. A notable sign of this is Intel Corporation’s (NASDAQ:INTC) proposed $15.3 billion acquisition of Mobileye NV (NYSE:MBLY), which is a top chipmaker in the category. According to the press release, the market size for next-generation auto technologies is expected to reach a whopping $70 billion by 2030.
So what about Ford?