Are Car Stocks Priced Properly?

4 mins. to read
Are Car Stocks Priced Properly?

As the stock market continues to rise, tech and growth stocks look increasingly overvalued. The AI revolution is so strong that the likes of Nvidia can be sold at any price. Challenging my recent view on this, the Nasdaq market continues its uptrend, beating all records. However, the rally isn’t broad-based and the Dow Jones, for example, is not following suit. Investors continue to favour stocks with strong growth prospects, even if that means paying much higher multiples. But this puts them in the uncomfortable position of being overly exposed to growth revisions. Small adjustments in the growth prospects of companies trading at high multiples can lead to large price corrections. And looking at what is happening now, I feel very uncomfortable paying current prices and prefer investing in companies with lower growth prospects that trade at multiples I can afford paying.

One stock that has always been under the radar for investors is Tesla (Nasdaq:TSLA). The carmaker turned AI player has a market cap of more than $565 billion, decimating century-old companies like Ford (NYSE:F) or GM (NYSE:GM). Investors believe Tesla has stellar growth prospects well into the future and are valuing the company at a multiple of 45x current profits. Given that Tesla’s forecasts aren’t that great, investors are expecting too much. It’s not that Tesla won’t be able to deliver something good, but investors are currently paying too much for it. It’s certainly not a reasonable multiple for an automaker, especially when you can buy Ford and GM at around 6x current profits. And for those who believe in Tesla’s AI-related prospects, I would say look elsewhere, perhaps towards Nvidia, Microsoft or Google.

At the end of 2019, just before the pandemic, Tesla shares were trading at around $29. By November 2021, they were trading at a high of $401, up more than tenfold. Rising demand for electric vehicles and optimistic forecasts made Tesla a star. However, the company has recently suffered some setbacks and is currently trading at $185. While the current price is less than half of its record high, it still represents a stunning reward for investors who hold the stock for the long term. However, when I compare Tesla to Ford and GM, the shares don’t look attractive at the moment. I would rather buy a more conservative car manufacturer or invest in a high-flying tech stock.

The table below summarises some metrics about Tesla, Ford and GM. The difference between Tesla and the other two is very clear: Tesla’s sales and profit growth prospects are greater, but so are its price multiples. At current prices, an investor buying shares in Ford or GM is essentially paying for the net asset value of those companies, which provides a very good safety margin for the case the economy turns to a more negative outlook, whereas Tesla is trading at 8x its net asset value. The truth is that Tesla’s return on capital employed is much better than for the other two, while it also has a much higher gross margin. But the flip side of this is the very high EV to EBIT (or low EBIT yield) currently implied by Tesla. Ford still offers a juicy dividend yield of 5.1%, and GM’s projected growth, while not at the same level as Tesla’s, is still very good. Moreover, Tesla’s market cap is almost ten times higher than the others, while it sold fewer vehicles than the others in 2023.

Selected Financial Data

Market Cap (in $Bn)46.75567.753.34
Vehicles sold (in Mn)
Gross Margin8.517.811.4
Dividend Yield5.1%1.0%
Turnover (in % chg)
EBIT (in % chg)
Source: Sharescope, Yahoo Finance

If we look more closely at each company’s business, there are some additional reasons to favour GM and Ford. Both companies have much more diversified product portfolios, while Tesla is focused on a few electric vehicles. Traditional automakers have largely delayed their EV projects, and for good reasons. The initial hype is fading and consumers are re-evaluating the real cost of driving an EV versus the more conservative alternative. Growth in the EV segment in the first quarter was minimal compared to the first quarter of 2023, and Tesla is no longer number one in sales, a position lost to China’s BYD. Although both the US and the EU are imposing tariffs on EV imports, BYD is still the lowest-cost EV manufacturer. In addition, the concentration of Tesla’s portfolio is also worrying, as there is a significant likelihood of a technology shift away from lithium towards cleaner alternatives.

In summary, I believe Tesla has the best growth prospects of the lot, but most of the juice is already priced in. For investors looking for a value opportunity, it may be worth looking at GM and Ford more closely, as both are trading closer to intrinsic value.

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