Ford Motor Company (NYSE:F) CEO Mark Fields put the company’s money where its mouth is on Feb. 10, announcing that it was investing $1 billion over the next five years to grab majority control of Argo AI, a Pittsburgh-based company that specializes in artificial intelligence and the development of self-driving cars.
Ford stock barely budged on the news, but it’s a pretty big deal.
“We are at an inflection point in using artificial intelligence in a wide range of applications, and the successful deployment of self-driving cars will fundamentally change how people and goods move,” said ARGO AI CEO Bryan Salesky in a statement. “We are energized by Ford’s commitment and vision for the future of mobility, and we believe this partnership will enable self-driving cars to be commercialized and deployed at scale to extend affordable mobility to all.”
Working in conjunction with some of the brightest roboticists and engineers at Ford and Argo AI, Ford’s Smart Mobility LLC segment is responsible for developing the commercialization strategy for the company’s self-driving cars and trucks. Its goal is to have a commercially viable driverless vehicle by 2021, less than five years from now.
What’s at Stake for Ford?
To finance this and other new technology investments, Ford announced in December that its automotive business was going to add $2.8 billion in long-term debt — the first time in four years that F has gone to the debt markets — selling $1.5 billion in 10-year notes paying 4.4% and $1.3 billion in 30-year notes at 5.3%. As a result, Ford’s long-term automotive debt increases 17.6% to $18.7 million, or a reasonable 37.6% of its market cap.
This financing comes on the heels of Fields’ December 2015 commitment to invest $4.5 billion by 2020 in the development of hybrid and electric vehicles. Ford is doubling down on smart technology.
“Ford Motor Company, though, is far further down the philosophical futurism path than GM. An investment in Ford stock right now is already an investment in a lifestyle/solutions provider company, even if it’s not readily apparent,” said InvestorPlace feature writer James Brumley in December. “Give it 10 years or so and it will become apparent, and shareholders will be glad the company was willing to gaze into the crystal ball.”
Investors might not like the fact that 3.1 million leases ended in 2016; another 3.4 million end in 2017 and 3.7 million in 2018. These overall industry figures will certainly hurt Ford Credit’s profit going forward, but the long-term financial implications of self-driving cars is extremely positive, in my opinion.
That’s especially true if Argo AI is able to take the technology that it develops for Ford’s self-driving cars and license it to other companies operating both in and outside of the automotive industry.
What’s at Stake for Ford Stock?
Currently, Ford has three business segments: Automotive, Financial Services, and All Other, which includes Smart Mobility LLC and its central treasury operations, both of which aren’t big enough to be their own reportable segments…yet.
In 2016, All Other had revenue of $1 (no, that’s not a typo) and a pre-tax loss of $867 million, $71 million higher than in 2015, which was $41 million higher than its pre-tax loss in 2014. That’s $2.4 billion in pre-tax losses over the past three years. It doesn’t look like those losses are going to diminish to any great extent in 2017 and beyond.
But, think about the revenue potential of Smart Mobility LLC come 2021 and the commercialization of self-driving cars. It’s significant. This is especially true now that F has invested in some of the best talent in the self-driving car industry — Argo AI’s Salesky ran Google’s self-driving car team and COO Peter Rander led Uber’s.
Once Ford is able to prove the technology works, Argo AI’s licensing revenue will likely go through the roof. If F meets the 2021 target to have a commercially viable vehicle, it could deliver a pre-tax profit by 2026, less than a decade from now.
Bottom Line on Ford Shares
Ford stock has seriously underperformed over the past five years, generating an annualized total return of 4.1%, 492 basis points less than General Motors Company (NYSE:GM) and less than one-third the return of the S&P 500.
Like Brumley suggests, the future is bright at Ford.
If investors are smart, they’ll buy F stock every time it drops below $12, which it did twice in 2016. With Ford shares up 4.8% year-to-date through Feb. 10, it might not happen immediately, but given profits at Ford Credit are expected to be lower in 2017, it’s safe to assume it will happen at least once over the remainder of the year.
Smart Mobility LLC is the key to Ford stock moving higher over the next 3-5 years.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.