The entire automotive sector is transitioning to electric vehicles, and the process is proving more difficult than expected. This is what is means for investors.
Executives at Ford Motor
Investors should focus on Tesla
The timing could not be worse for Ford. The Detroit, Mich.-based company is gearing up to make a lot of new electrified F-150 pickup trucks, its most popular line of vehicles. Ford announced plans in April to build 150,000 F-150 Lightnings in various trims, a 275% increase over the inital goal.
The vehicles, ranging in price from $39,974 to $90,000, have been extremely well-received by the automotive press. Even the base model is capable of sprinting from 0-60 mph in seconds, and towing 7,700 pounds. And Lightnings are equipped with 11 conventional electrical outlets, the perfect accompaniment for contractors running table saws, air compressors and welding setups.
The Wall Street Journal notes that the recall of 48,924 Mustang Mach-E vehicles is effectively all of the cars produced for the American market over the past two years. Even worse, the action will halt deliveries of new EVs while engineers look for a fix. A software update is expected sometime next month.
The tardy response to an EV glitch is eerily similar to the Chevy Bolt saga at General Motors
The problem was ultimately resolved, yet not before the damage was done. LG Chem, the battery manufacturer agreed to eat $1.9 billion of the price tag for the fix. However, General Motors announced in early June that 2023 Bolts would get an 18% price cut, to only $26,595.
Even with the lower prices, General Motors will have a tough time catching Tesla, the industry leader. Tesla sold 197,517 vehicles in the United States in 2021, versus only 9,216 for Ford, and 36,325 for General Motors respectively. And Tesla EVs are vastly more expensive on average.
Tesla is getting the engineering right.
Its EVs are free from the legacy constraints of ancient automotive parts supply chains. The software was developed in-house, as opposed to being cobbled together from third parties. And despite its relative youth, Tesla is the most vertically integrated company in the sector. The result is a gross margin of 27.1%, almost 3x the industry average.
It’s not news that Tesla is in the best position to dominate the sector moving forward. Shareholders have been rewarded as the stock zoomed to a $670 billion market capitalization. Ford and GM shares are valued at approximately $47 billion apiece.
Investors are missing the scope of the challenge Tesla competitors face.
Their strength, in varying degrees is legacy supply chains. Their weakness is access to batteries, electrical components and software engineering talent. Tesla dominates these categories due of its enormous scale, and cutting-edge technology.
A survey by Universum in 2020 found that Tesla became the number one preferred choice for engineering graduates in the United States. It was the only automaker to crack the top 10, that included SpaceX, Lockheed Martin
Tesla shares have been on a rough ride since last November when they breezed through $1,200. At $662 shares still trade at 41.5x forward earnings and 10.7x sales. While the longer-term prospects for Tesla are extremely bright, investors should steer clear of new investment until shares move back above the $900 level.
That may seem like an odd recommendation. It is purposeful. There is no need to put money to work until the uptrend resumes.
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