Electric vehicles (EVs) are one of the biggest investment trends right now. With the immense wealth created for You’re here Investors Over the past decade, many investors are looking to other auto companies that could offer similar returns to shareholders. Considering the gigantic value the market has placed on Tesla and the hundreds of thousands of vehicles it now sells each year, mainstream automakers have ramped up production to bring their own electric vehicles (EVs) to customers.
Ford (NYSE:F) is one of those companies. The 118-year-old Detroit automaker is investing tens of billions of dollars to ramp up electric vehicle production and is seeing big early signs of demand for its electric vehicle product line. These early signs of success have changed investor sentiment on Ford stocks, with shares up 54% in the past year, actually outpacing Tesla’s 7% return over the same period.
With Tesla reaching a market capitalization of $1 trillion by the end of 2021, many investors are likely wondering if Ford can reach those same heights. Can Ford reach a trillion dollar market cap by 2030?
Investments in electric vehicles are paying off
The majority of Ford’s business currently consists of selling gas-powered cars. These include the popular F-150, Bronco, Explorer and many other vehicles. While these products should generate stable sales and profits for Ford over the next three to five years, its future is in electric vehicles. This is where investors should focus their analysis, as the company’s success in the emerging industry will determine whether the company is still relevant a decade from now.
Management does not take the transition lightly. The company has pledged to invest $30 billion in capital expenditures for electric vehicles over this decade. This includes $20 billion for car manufacturing and $11.4 billion for battery production (batteries are what make electric vehicles possible). Those dollars will help evolve Ford’s many different EV products, including the Mustang Mach-E and E-Transit work vans. By far the most important product, however, is the Ford F-150 Lightning.
The F-150 is the most popular car in America, accounting for 3% of total new car sales in 2021. Implementing this renowned EV product line is crucial as there is a huge customer base for brand across the United States. States.
Although still in its early stages (the first truck won’t ship until the first half of this year), there are signs the F-150 Lightning will sell well. The company already has 200,000 refundable deposits for F-150 Lightning reservations, which has effectively forced the company to stop taking new reservations for the time being. If that translates to widespread customer demand once production of the F-150 Lightning ramps up over the next three to five years, Ford could have a hit on its hands.
The market opportunity is large but crowded
You can’t blame investors for being optimistic about the electric vehicle industry, because there will likely be trillions of dollars spent by consumers on electric vehicles over the next few decades. Analysts estimate electric vehicle unit sales will top 10 million in 2022, which is a good chunk of the 60-70 million annual car sales worldwide. At an average selling price (ASP) of $25,000, 10 million EV unit sales equals a $250 billion revenue opportunity. With 50 million annual sales, that means a $1.25 trillion annual revenue opportunity.
That might make you optimistic about Ford’s EV opportunity, since it’s one of the top automakers in the United States. But internationally, it has yet to break into any region, with less than 10% market share in all regions outside of North America and just 5.1% global market share in 2021. And with so many well-capitalized competitors around the world, such as Toyota, volkswagenTesla and Chinese automakers, gaining significant market share will be a tough hill for Ford to climb.
Is a $1 trillion market cap in the cards?
In 2021, Ford had revenue of $136.6 billion, making it one of the largest companies by revenue in the United States. Compared to its $71 billion market capitalization, that might make the stock look cheap, especially if you’re bullish on its electric vehicle plans.
However, it should not be forgotten that automakers have very low profit margins (Ford had an adjusted EBIT margin of only 7.3% in 2021) and a recurring need for large investments. This makes it difficult for auto companies to generate free cash flow margins well above 5% for shareholders and is why they are typically valued at a price-to-sales (P/S) ratio of less than one.
Ford can deliver strong returns to shareholders through regular dividend payouts – the current yield is 2.24% – and incremental increases in annual profits. But unless it dominates the entire global auto industry and/or invents a highly profitable new line of business, don’t expect Ford to hit a $1 trillion market capitalization. by 2030.
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