RIVN - Ford: Tesla Fires The Opening Salvo

Summary

• Ford is down substantially today on the news of new major discounts offered by Tesla.
• Ford isn't the only auto manufacturer either. All of the top five largest auto manufacturers are down on the news.
• In the following piece we divulge our take on the outcome of the ensuing price war and determine which is the better buy at present Ford or Tesla.

What happened?

Tesla ( TSLA ) announced major discounts today on top of the earlier discounts offered in China. According to Seeking Alpha news:

"Tesla (NASDAQ: TSLA ) fell in early trading on Friday after unveiling significant price cuts in the U.S. and Europe. The price cuts range from 6% to 20% for Model 3, Model Y and various performance models.

Wedbush Securities analyst Dan Ives expects an initial negative reaction to the development, but thinks it is the right strategic move by the electric vehicle maker amid some cracks in demand.

"Tesla now has global scale (Austin, Berlin, further China build-out) it did not have a few years ago and has margin flexibility to make aggressive moves like this to gain further market share in this EV arms race," noted Ives.

Ives reminded that the Model Y is likely to benefit from tax credits in 2023. He also predicts the wave of price cuts could spur demand by 12% to 15% globally this year in an offensive move to grab market share. "

These developments do not bode well for the major auto manufacturing industry writ large. The five largest OEMs taking the biggest hits were; Rivian ( RIVN ), Ford ( F ), General Motors ( GM ), Stellantis ( STLA ), and Honda ( HMC ).

Top Five OEM Losers

So what does this mean for Ford?

I am going to drill down and focus in on Ford since that is the stock I am interested in. Just for starters, this is definitely not good news. Ford is already confronting issues with sales slipping in 2022. It was the worst year writ large for the auto industry actually. So who will win the price war?

Who Wins the price war?

When considering who will come out on top regarding the price war, it's definitely a lose/lose scenario for both Ford and Tesla. Yet, the one bright spot may be that it causes the smaller, still yet unprofitable, EV entrants such as Fisker ( FSR ) to actually go out of business or be acquired. Fisker was down nearly 10% on the news and is down over 50% for the year.

So the first point I'd like to make is, I posit this price war may serve to weed out some of the smaller players which will be beneficial to both Ford and Tesla. Tesla wins the first round regarding its battle with the big boys like Ford and General Motors ( GM ) by now being able to take advantage of the tax credits as well. Let me explain.

Tax Credits: Advantage Tesla

Tesla has staying power due to the fact the price discount will qualify the vehicle purchase for the IRS tax credit by bringing Tesla's MSRPs under the new guideline limits of $55,000 for cars and $80,000 for SUVs.

Ford, on the other hand, will not materially benefit from the tax credits as it is still primarily an ICE manufacturer. Plus, Ford has actually been upping the price of its primary EV vehicles, the Ford F150 Lightning and the Mustang Mach-E, due to having pricing power. The company needed to because of inflationary cost increases related to both EV materials and production. Nonetheless, they do have an advantage with still being primarily an ICE auto manufacturer. Here is why.

Margin Room: Advantage Ford

Although the tax credit will increase sales for Tesla, Ford still has a lot of excess margin to go to war with in its ICE segment. The company just reported they have significantly increased profit margins in North America and continue to have strong pricing power.

So the ICE car and truck profits can probably help ease the pain of any future discounts Ford may have to implement to compete with Tesla in the EV space. It's still going to hurt though. So which is the better buy based on what lies ahead? Let's turn our attention to the stocks of each company now to make a determination.

Ford wins the valuation war hands down

Regarding valuation, Ford knocks Tesla out in the first round.

Ford Seeking Alpha Quant Valuation Metrics

Ford is trading for a song basically with a forward P/E ratio of 6.77 and score a b+ quant rating. This is due to the fact that even though Ford has been the talk of the town as of late with its entry into the EV market and the F150 still the #1 selling truck in the USA, investors remain wary of the stock. Ford has a reputation of talking a big game and then for one reason or another not coming through in the end. The stock is actually down 50% on the year even though its made a nice 10% run as of late.

Ford current chart

The stock has experienced a nice run up recently. Nevertheless, its still trading below major resistance at the top of the downtrend channel. No bueno. Now let's take a look at Tesla's state of affairs. Shall we?

Tesla Seeking Alpha Quant Valuation Metrics

Tesla, on the other hand, has a stratospheric valuation currently trading with a forward P/E ratio of 30 and scores a D quant rating. This is due to the fact that Tesla has experienced the exact opposite investor sentiment as Ford. Tesla has enjoyed being owned by " true believers " that are in it for the long haul. This is exemplified by the fact that Tesla has a market cap of %377 billion which is multiple times the market cap of Ford and General Motors combined.

Keep in mind this is even after losing over $600 billion in market cap in just the last couple of years.

Tesla current chart

Tesla's stock is down 66% on the year as Elon Musk seems to have alienated his core group of buyers by spending too much time on Twitter saying exactly what they do not want to hear, apparently, just my opinion. The prevailing narrative for the sky high valuation is that Tesla is not just a car company, but a technology company. Well. that may not serve to be such a great rationalization much longer. Long duration technology growth stocks have been getting battered and beaten down as of late due to the Fed raising rates at a fast and furious pace. Now let's wrap this up by declaring a winner.

Ford takes the checkered flag

Based on the fact Ford has the financial wherewithal to withstand this first price discount salvo from Tesla, I see Ford as the better buy at this time. What's more, Ford's stock forward P/E of 6.77 is a vastly better value than Tesla's at 30 as well. Further, even though Tesla will get some relief brought on by the increased volume of sales due to perspective buyers being able to take advantage of the $7,500 tax credit, Tesla will still see its margins pressured further. If we weren't in the present macro set up with the Fed raising rates and also on the brink of a recession, I might give the nod to Tesla. But with Elon seemingly more focused on upsetting his client base on Twitter presently rather than focusing on Tesla's mounting issues, I see more upside in Ford's stock at present. Ford wins by a country mile representing the better buy at present. Those are my thoughts on the matter. I look forward to reading yours.

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