The Detroit News
Feb. 21, 2022
Wall Street has long taken a dim view of legacy automakers — but that’s begun to change as the likes of Ford Motor Co. and General Motors Co. demonstrate they’re serious contenders in the electric and digital revolution that’s reshaping the automotive industry.
This reassessment is happening even as investors appear to be cooling on many of the pure-play electric-vehicle startups that had been richly valued by financial markets seeking the next Tesla Inc. Some of them are now struggling with leadership shakeups, federal investigations, challenges ramping up production amid unprecedented supply-chain disruptions, short sellers targeting them, and growing competition from traditional manufacturers.
“What we’re seeing, certainly since the start of the year, is a shift in fund flows from the growthier, more speculative names, a lot of the new EV companies, and sort of a re-rating of the traditional auto manufacturers,” said Garrett Nelson, an equity analyst at CFRA Research. “I think the Street is now looking at the traditional automakers and seeing an opportunity for a re-rating of those businesses as their EV share increases.”
Experts point to Ford in particular as a good example of this trend. It was the top-performing auto stock of 2021, soaring roughly 138%. Meanwhile, GM’s stock on Jan. 4 posted its highest-ever closing price — $65.74 — since emerging from bankruptcy over a decade ago.
Since then, shares of both automakers have slipped on earnings reports that disappointed some investors amid a broader market contraction. And both still have to execute on their plans, with crucial milestones looming through the middle of the decade. Still, experts say, the narrative has shifted significantly in the last couple of years.
“I think what the markets have been seeing in the last six, nine, 12 months — at least for the legacy automakers who they thought were suddenly going to get swamped by all these newcomers that were focused on EVs — is the industry seems to be pivoting much faster than the Wall Street types expected,” said Sam Abuelsamid, an e-mobility analyst at Guidehouse Insights.
“I think the markets are saying, ‘These guys have a pretty decent chance of not just surviving, but thriving, in this new era.’”
Tesla Spurs Investment
Historically, investors have valued legacy automakers as mature businesses with low prospects for growth. That assessment remained even as Tesla — which now has a valuation of nearly $1 trillion — emerged as the dominant force in the burgeoning EV segment.
That’s because investors have viewed Tesla as a tech stock — despite the vast majority of its revenue coming from car sales — and because they’ve bought into the company’s promises of revenue growth enabled by autonomous driving, Abuelsamid said.
That success on the stock market — and more recently, Tesla’s ability to significantly ramp up vehicle production — has driven a wave of investment into other EV-only companies attempting to follow in Tesla’s footsteps. The Austin-based company’s stock closed at $856.98 per share at week’s end (the market was closed Monday for Presidents Day), down more than one-fourth from the start of the year but still valued more highly, by far, than any of its competitors.
Meanwhile, EV-related companies that went public via special purpose acquisition companies (an increasingly popular way to bring a company public and sidestep the traditional initial public offering process) raised about $15 billion in 2021, Bloomberg reported earlier this month, citing new data from its research service.
But spurred by tightening environmental regulations, growing consumer and investor appetite for plug-in vehicles, and Tesla’s success, legacy automakers have accelerated their pivot to electrification, committing to tens of billions of dollars in investments over the next several years. Despite the massive spending and pivot this entails, auto executives have signaled they see huge growth opportunities in EVs, digitally connected services and, eventually, autonomous vehicles — and, over the last year or two, Wall Street has started to take note.
For years, Ford shareholders were frustrated with the Dearborn automaker’s lagging stock price, which was hovering around $7 per share two years ago. On Friday, it closed at $18.04 per share — up amid reports that CEO Jim Farley is looking at ways to separate the company’s electric-vehicle business in a bid to boost investor sentiment.
Under Farley, who took over in October 2020, the Blue Oval has laid out a turnaround strategy centered on electrification, digital connectivity and commercial vehicles. It’s boosted its EV spend to $30 billion through 2025. It launched the all-electric Mustang Mach-E to largely positive reviews, and this spring will launch a battery-electric version of the F-150, America’s best-selling truck — a move that experts see as a bellwether moment for EV adoption.
“The (F-150) Lightning launch — it’s the epicenter of the future of the Ford story,” said Dan Ives, an analyst at Wedbush Securities. “They’ll have clear speed bumps from the supply chain — but if they knock it out of the park, Ford globally starts to be viewed not as your grandfather’s Ford, but as a next-gen EV disruptor.”
In 2021, Ford became the second best-selling EV maker in the U.S. behind Tesla — a position it’s vowed to maintain as it aims to boost annual EV production capacity to 600,000 by the end of next year.
Investors have reacted positively to what’s happening at the Blue Oval. Ford was the highest-growth auto stock last year, and on Jan. 10 it surpassed $25 per share in intraday trading — the highest price it’s hit in more than 20 years. The stock is down about 17% from the start of the year.
“We think Ford is well on its way to achieving this transformation,” said Nelson of CFRA, which has a buy opinion on the automaker.
The firm has a hold opinion on GM’s stock, with analysts there believing the Detroit automaker “still has a ways to go” in proving it’s capable of pulling off this pivot, Nelson said.
GM aims to field a zero-emissions lineup by 2035, with plans to introduce 30 new EVs by 2025. The automaker recently launched the GMC Hummer EV pickup truck, is launching the Cadillac Lyriq soon, and recently unveiled the Silverado EV that launches next year and already has 110,000 reservations, among other planned EV offerings.
On a recent call with analysts, CEO Mary Barra underscored the need to move faster, announcing the company is targeting 400,000 EV deliveries in North America by the end of 2023.
“We can and we will keep up our aggressive pace backed by strong results,” she said, noting that the company’s “clear priority is to accelerate our EV plan and drive growth.”
As recently as a couple of years ago, said Guidehouse’s Abuelsamid, investors perceived legacy automakers as being slow to the electric transition and believed they would lose market share to EV startups like Rivian Automotive Inc. and Lucid Group Inc. But that perception has changed in the last year or so, thanks in part to major EV reveals and launches.
And traditional car makers have a potential advantage over pre-revenue startups: profits from their internal combustion engine vehicle sales. Even Tesla, which was founded in 2003, didn’t have a profitable year until 2020. Legacy manufacturers also have global scale and distribution networks.
And in the last couple of years, Ford, GM and other legacy automakers have taken steps to shore up their EV supply chains, signaling they’re serious about electrification, said Abuelsamid: “One of the things that, for the financial markets, demonstrates the seriousness of the automakers to make this switch to electric is the fact that they are not just announcing these electric vehicles, but they are also investing heavily in the entire supply chain, in battery production, and down the line to raw materials and some of the intermediate materials that are required to produce batteries and to produce the other components.”
Also noteworthy for investors is that both Barra and Farley say they see significant growth opportunities tied to digital connectivity. GM expects to double its revenue to about $280 billion by 2030 and hit profit margins of between 12% and 14% by that time, with connected services and subscriptions underpinning much of that growth. And Ford projects that, by 2030, new connected services could be worth more than $20 billion in revenue.
Not all investors are convinced, at least in the short term. Morgan Stanley, for example, downgraded GM’s stock earlier this month from overweight to equal weight on the automaker’s outlook for 2022 and concerns about its EV plans, CNBC reported. And investment bank Jefferies in January downgraded its rating of Ford to a hold, with analyst Philippe Houchois saying that it is “premature to re-rate legacy OEMs for their electric vehicle progress since earnings remain mostly driven by cyclical shortages, returns remain within historical norms and the EV transition is largely a zero-sum-game initially.”
“Investors are highly skeptical, especially of GM and Ford, after so many stumbles over the last decade,” said Wedbush’s Ives. “But now with electric vehicles, it’s the biggest transformation to the auto industry since the 1950s, and Detroit stands to play a big role.”
EV Stocks Stumble
Meanwhile, once-hot EV stocks have tumbled recently.
Rivian, widely seen as one of the most promising Tesla contenders, had the largest initial public offering of 2021, raising about $12 billion. The company is backed by Ford and Amazon, and has a contract to build delivery vehicles for the e-commerce giant. But amid challenges ramping up production, the market has erased much of the company’s post-IPO value, with the stock dropping from a high of $127 per share at Nov. 16’s close to less than $70 per share last week.
Another startup, Lordstown Motors Corp., saw its stock plummet in the face of numerous controversies and recently has hovered at less than $4 per share. The automaker faced a short-seller report claiming it misled investors about the orders it had for its Endurance truck and last year became the subject of a federal investigation into its business, among other issues.
Another embattled startup, Nikola Corp., also has seen its stock tank since it went public via a SPAC deal in 2020, at which point its market capitalization soared past $30 billion. But it has since faced controversies including the indictment of its founder on charges of criminal fraud related to the business, which he’s denied. Bloomberg reported that the company paid a $125 million civil penalty to resolve fraud claims. Its stock closed at $7.92 per share on Friday, down nearly 23% so far this year and nearly 90% from its peak closing price.
Faraday Future Intelligent Electric Inc. went public via SPAC in 2021 and it, too, has dropped over the last few months. It said earlier this month that its chairman, Brian Krolicki, was stepping down after an internal investigation found the company may have misled investors about pre-orders, Bloomberg reported.
“It’s been a dark cloud over EV SPACs,” Ives said. “And some of that is macro, but a lot of it is company-specific, and it’s caused investors to be skeptical of many of these stories.
“And what that’s ultimately done, it’s caused more investors, when they want to play the EV and green tidal wave theme … to play through the likes of Ford and GM.”