In the past two years, some of the hottest stocks in the market have been electric vehicle stocks. Unfortunately for Ford (NYSE:F) investors, Ford stock has significantly lagged behind.
High-flying EV pure plays Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) are each up more than 500% in the past two years. Ford stock is up just 44% in that time, roughly in-line with the overall S&P 500.
Investors are understandably excited about the massive long-term growth potential of the EV market. However, their enthusiasm for Nio and Tesla seems to be based on the hope that maybe a decade from now they will grow into what Ford actually is today.
Nio and Tesla are both struggling to turn a profit. They are both diluting shareholders to fund their expansion efforts. Ford, on the other hand, recently guided for adjusted earnings before interest and taxes of between $8 billion and $9 billion in 2021.
For investors wanting to play the EV trend at this point, you have two options. You can buy into high-flying EV stocks at bubble valuations. Or you can buy Ford stock at a dirt-cheap valuation just as its EV business is starting to ramp up.
Ford Stock Is an EV Play
Tesla is an excellent example of a story stock. Story stocks are stocks that investors buy because they believe in a story that suggests the stock price is going higher over time.
Tesla’s story is that EVs are the future, and Tesla dominates the EV market.
In reality, Tesla only dominates the EV market today because it has virtually no competition. And its business pales in comparison to Ford’s. For example, in the fourth quarter of 2020, Tesla reported $10.7 billion in revenue, while Ford reported $35.9 billion in revenue.
Tesla’s rapid growth in recent years has been funded by dilutive equity raises. Tesla’s outstanding share count is up 43.4% in the past five years, while Ford’s has remained steady.
Ford is now planning to invest $22 billion in EVs and $7 billion in autonomous vehicles through 2025. Ford is planning to release an electric version of its cash cow F-150 pickup in mid-2022.
However, Ford’s EV initiative is already off to a great start. In December, Ford launched its all-electric Mustang Mach-E. Morgan Stanley recently released its EV sales report for the month of February. The firm found Tesla’s share of the market dropped to 69%, down from 81% a year ago. Morgan Stanley said the Mach-E accounted for “nearly 100% of the share loss.”
In other words, a single Ford EV model snatched up 12% of Tesla’s market share. That’s a good sign for Ford stock investors looking ahead over the next several years.
Ford Is a Value Stock
In the past 18 months, Tesla shares are up 1,180%. Ford stock is up just 34.3% in that time. Tesla shares trade at about 115.9 times 2021 earnings. Not to mention most of those earnings are currently coming from regulatory credit sales. Analysts expect those sales to dry up completely in coming years.
Meanwhile, Ford stock trades at just 7.8 times projected 2021 earnings. Most of those earnings are coming from F-150 sales, not regulatory credits.
Tesla also trades at 19.4 times sales, while Ford stock trades at just 0.37 times sales. Other high-flying EV pure-play stocks are priced at similarly absurd levels. NIO trades at 22.9 times sales. Workhorse (NASDAQ:WKHS) trades at 1,143 times sales. Nikola (NASDAQ:NKLA) trades at 56,154 times sales.
The crazy thing about those absurd pure-play EV stock valuations is that they have actually come down a bit as of late. Since the beginning of February, each of the four pure-play EV stocks I mentioned are down between 26% and 65%. Meanwhile, Ford stock is up 13.3%. If the broad market rotation from growth stocks to value stocks continues throughout 2021, Ford stock could be a big winner.
Given the valuations mentioned above, the bursting of the EV stock bubble may be just getting started. Ironically, Ford’s EV business is also just starting to ramp up. The competition will be fierce in the next couple of years, and Ford has the luxury of using its F-150 profits to fund its EV and AV growth.
How to Play it
Momentum stocks are great until the momentum runs out. It’s been a great two-year run for the EV pure-play stocks. But while market bubbles can last for a long time, they never last forever.
I believe EV technology is a great long-term investment. However, paying bubble prices for stocks like Nio and Tesla is playing with fire. There is simply no way to justify EV stock prices at this point, and I think they could still be in for years of underperformance.
My top EV stock pick is General Motors (NYSE:GM), which is also a value stock ramping up its EV game in coming years. However, Ford stock is also an excellent way to gain exposure to the next generation of auto technology at an extremely attractive valuation.
On the date of publication, Wayne Duggan held a long position in GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
