The auto industry is going through its biggest transition since Henry Ford made the assembly line a standard in the industry. Internal combustion engines are slowly but surely being replaced by electric vehicles that offer the potential for both lower cost of ownership and cleaner operations.
On top of the growth of EVs, self-driving vehicles are on the horizon, and they could upend the auto industry as we know it. With that backdrop in mind, is the old-school Ford (NYSE: F) or upstart Tesla (NASDAQ: TSLA) a better buy for investors today?
Image source: Tesla.
Tesla's staggering size
Despite the fact that Tesla is much younger and sells far fewer vehicles, the company actually has a bigger market cap than Ford.
The similarity of the value of the companies is in stark contrast to the scale of operations at Tesla and Ford. Over the past year, Ford had more than 12 times the sales of Tesla and built 6.6 million vehicles in 2017, or about 127,000 per week. Tesla recently completed a single week where it produced 5,000 Model 3s. Granted, Tesla is quickly ramping up Model 3 production, but it would need to grow for a long time to catch up to Ford. For context, to catch up to Ford's level of sales, Tesla would have to grow sales 25% per year for 12 consecutive years.
Tesla also hasn't proven it can make money from making cars. The chart below shows the company's cash flow from operations. This is just the money generated from operating manufacturing plants; it doesn't even include the cost of building the plant itself, which totaled $4 billion from Tesla last year.
Tesla's investment thesis isn't necessarily about past performance, but if the company can't prove its ability to make money, it won't be a good investment long term. Right now, we have proof that Ford can make money while transitioning to building an electric, self-driving fleet, and we don't know if Tesla can make money building any vehicles.
Tesla isn't as far ahead of Ford as you might think
The bullish case for Tesla is that it will lead the way to a new transportation future. Electric vehicles are part of the formula, but so is autonomous driving. But Tesla isn't as far ahead in either as you might think.
According to Navigant Research, Ford is well ahead of Tesla in terms of both strategy and execution in self-driving vehicles.
Ford is planning to launch its own self-driving vehicle fleet in 2021, using a vehicle built specifically for ride sharing. Tesla has pushed its self-driving technology to its vehicles more quickly than others, but it's well behind in terms of full autonomy research. The company isn't using LIDAR, or light detection and ranging, like its competitors, and that may be a fatal flaw for Tesla. There's no certainty the cameras Tesla uses as the basis for its for self-driving technology will ever be as reliable as the LIDAR systems with redundancies that competitors like Ford are already building today.
There's also no guarantee Tesla will remain a leader in electric vehicles for long. General Motors, VW, and Ford are just a few of the automakers setting their sights on the EV market. Ford says it will invest $11 billion by 2022 to bring 40 hybrid and full-electric vehicles to market.
Ford is the better bet today
Shares of Ford trade for just 7.2 times 2018's earnings estimates, and considering the company's planned transition to electric vehicles and its development of self-driving vehicles, I think it's a much better buy for investors. Tesla could continue to be a disruptive company in the auto industry, but it hasn't proven that it can make money, and until it does, I will remain skeptical of the stock.
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