Tesla Inc. (TSLA, Financial) enjoys competitive advantages in the electric vehicle industry as the most prominent brand name in the sector. Over the last five years, Tesla has come a long way to dominate the EV market, becoming the first company of its kind to achieve profitability at scale, while legacy automakers continued to be reluctant to embrace EVs.
Today, the playing field is changing as established automakers are aggressively investing to electrify their fleets of vehicles. General Motors (GM, Financial), Ford Motor Co (GM) and Toyota Motor Co (TM, Financial) have unveiled multi-billion-dollar investment plans spanning a few years that threaten Tesla’s dominance in the U.S. EV sector, and some of these investments are already yielding promising results.
With the EV market set to grow exponentially in the next decade, supported by government incentives to buyers of electric cars, a favorable shift in consumer preferences and the improving vehicle charging infrastructure, growth investors are keenly following the automobile industry to unlock new investment opportunities. Despite Tesla’s dominance, Ford stands out as one of the automakers that I believe is best poised for growth in the EV sector.
Market share gains for legacy automakers
Not surprisingly, Tesla dominated global battery electric vehicle (BEV) sales in the first half of this year:
| Automaker | Market share in H1 2022 |
| Tesla | 19% |
| BYD Co (SZSE:002594, Financial) | 11% |
| SAIC Motor (SHSE:600104, Financial) | 10.8% |
| Volkswagen Group (XTER:VOW3, Financial) | 7.3% |
| Hyundai Motor Co (XKRX:005380, Financial) | 5.6% |
Source: Inside EVs
Although Tesla is comfortably leading the global EV market, competition in the U.S. is heating up with legacy automakers gaining some ground. According to Barron’s, at the end of the third quarter, Tesla accounted for 63% of the U.S. EV market, but this is a notable decline from over 75% in the corresponding quarter last year.
This market share loss can be attributed to the recent success of legacy automakers. For instance, on Oct. 3, General Motors announced that it had sold 14,709 Chevy Bolt EVs in the third quarter compared to just 4,515 units in the third quarter of 2021, making it the best quarter ever for Bolt since its launch. To keep up with the surging demand for EVs, General Motors plans to ramp up the production of Bolt EVs.
Ford is also making a strong statement with its F-150 Lightning, which became the best-selling electric truck in the U.S. in the third quarter. Ford’s EV sales registered a 197% gain in September, lifting Ford’s share of the U.S. EV market to 7% from 3.9% in the third quarter of 2021.
To penetrate the EV market further, leading automakers are willing to invest substantial amounts of money in the next few years:
- Ford expects to invest $5 billion to electrify its fleet this year. Investments in EVs are projected to eclipse $50 billion by 2026.
- General Motors is planning to invest $35 billion in EVs through 2025.
- Toyota has announced a $70 billion investment in EVs through 2030.
With the EV market still having a long runway for growth, it seems reasonable to conclude that most automakers will end up with handsome rewards for their investments in this sector. Investors, however, need to walk with caution because not all EV producers will turn out to be strong stock investments going forward.
The investment thesis for Ford
My favorite EV play is Ford. Why? In the U.S., consumers prefer trucks and SUVs to sedans, unlike in Europe where small cars dominate the passenger vehicle market. For some context, according to data from Capital One, eight out of the top 10 best-selling vehicles in the U.S. in 2021 were SUVs and trucks. Until this year, American consumers did not have a lot of choices when it came to EV trucks, which could be one of the main reasons behind the lackluster growth of the U.S. electric vehicle industry in comparison to Europe and China. With many EV trucks expected to be launched in the U.S. in the next couple of years, it is reasonable to expect accelerated EV adoption in my opinion. Ford, as one of the most prominent truck makers in the country, seems well-positioned to make the most of this promising development.
With Ford aggressively investing in EVs, it is no longer prudent to value Ford as a traditional automaker by my estimates. Ford still trades at a forward price-earnings ratio of just over 6 whereas Tesla is valued at over 53 times expected earnings for next year. By 2025, EVs will account for a major share of Ford’s revenue and earnings, and Mr. Market is likely to adjust to this new reality. Although an investor should not expect Ford to trade at earnings multiples as high as Tesla’s due to the sentimental dragdown from the legacy gas-powered vehicles, it is reasonable to expect the valuation disparity between these two companies to improve in Ford’s favor over the next few years, thereby paving the way for investors to see multiples expansion.
Ford also offers a quarterly dividend of 15 cents per share, which makes the stock more attractive than Tesla in my view because it provides some security in times of underperformance.
Conclusion
Tesla enjoys first-mover advantages in the EV market, but legacy automakers are rapidly gaining ground with multi-billion-dollar investments aimed at embracing EVs. Recent data suggests Tesla is losing market share to the likes of Ford and General Motors as consumers opt for cheaper options and EV trucks. Ford stands out as a legacy automaker to look out for as the company makes progress with its reorganization plan to build its business centered around electric vehicles.
