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Is Ford Stock Too Vulnerable to Industry Disruption?

Tom Taulli

Ford Motor Company (NYSE:F) really does look like a compelling value play. Keep in mind that Ford stock has been out-of-favor since 2014, with shares off about 36%. As of now, Ford trades at a forward price-to-earnings multiple of only 7.4X. The dividend yield is also an attractive 5.3%.

All this sounds pretty good, right? Certainly. But it is important to consider that value stocks can stay in a rut for a prolonged period of time.

Ford Stock

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To get out of this, there usually needs to be a significant transformation of the company. In fact, this has happened with other long-time laggards, such as Microsoft Corporation (NASDAQ:MSFT). And yes, the returns can be significant.

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But when it comes to Ford stock, I think investors will still need to wait. The fact is that the company has been a laggard in keeping up with the wrenching changes in the auto market.

Challenges for Ford Stock

First of all, there is the focus on electric vehicles. Despite major investments in this category, Ford has mostly been a flop. Here’s how a report from Berenberg puts it: “The current EV offering, the Ford Focus Electric, is not competitive on price versus range, and it looks unlikely to us that Ford will catch up on pure EVs in the foreseeable future. Unless Ford materially increases its efforts on the pure EVs, the gap versus peers is expected to widen even further.”

When it comes to market share, Tesla Inc (NASDAQ:TSLA) is the dominant player. The company’s lead is likely to expand even more with the rollout of the Model 3, which is targeted at the mainstream market. TSLA has big-time advantages, such as with its branding, a network of charging stations and the massive gigafactory infrastructure for battery production.

Yet for Ford stock, perhaps the most important initiative is autonomous vehicles. According to research from IHS Automotive, there will be about 21 million such vehicles on the market by 2035 and roughly 4.5 million will be in the U.S. market.

Regarding Ford’s efforts, a key is the investment into startup Argo AI, which will involve an investment of $1 billion for the next five years. The goal is to develop a full-stack system for an autonomous platform. Note that the founders of Argo AI come from Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) and Uber.

Although, there are ominous signs for Ford stock that the venture could prove very challenging. Let’s face it, Argo AI will need to develop technologies that leverage complex systems like deep learning, robotics and motion sensing. It will also be tough to recruit the engineering talent, especially when vying against mega operators like Apple Inc. (NASDAQ:AAPL), GOOGL and Uber.

Even Ford Motors CEO Mark Fields has been hedging, as he said this recently at a conference: “If you think about a vehicle that can drive anywhere, anytime, in any circumstance, cold, rain — that’s longer than 2021. And every manufacturer will tell you that.”

Bottom Line On Ford Stock

For Ford stock, the secular trends of electronic vehicles and autonomous systems are not the only things to worry about. Ride-sharing platforms like Uber and Lyft are also likely to make a big impact. Already it appears that Millennials are rethinking the virtues of car ownership. The same could be the case with Baby Boomers, who may not need to drive as much since they will be entering their retirement years.

So even though Ford is making the right moves with its investments in startups, this strategy is far from a sure thing. History is rife with many examples of mature companies that have failed to make transitions to the changing landscapes of market conditions.

In other words, if you are looking at Ford stock for stability, then there could be disappointment.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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