In covering Tesla, Inc.'s (TSLA) entry to the S&P 500, we touched on a seeming oversight by the market. Going off the valuation gaps between Tesla and every other car maker, the market seemed to be completely discounting the potential for established automakers to implement electric and automated vehicle technology into their well-developed production lines. While there still exists a significant gap between Tesla and the rest, it does appear that the market is paying attention to the wider field of automakers again.

Key Takeaways

  • General Motors Company (GM) and Ford Motor Company (F) have seen their shares rally to start 2021.
  • Part of the interest in the traditional automakers relates to their accelerated plans to pivot to electric vehicles (EVs).
  • Although Tesla and newer automakers enjoy most of the buzz, traditional automakers have the advantage of being incumbents in the market with well-developed supply chains.

Making Headlines for Technology Bets

Ford and GM have both started off the year strong, seeing double-digit gains. In January, GM stock was up over 35% at one point and still sits comfortably up 20% from where it started the year trading. Ford stock has seen almost identical price action, surging up 35% and then settling around 23% up in recent trading. Both GM and Ford are likely seeing more market attention because of EV plans and recent technology announcements.

It was recently announced that Microsoft Corporation (MSFT) would be investing in GM's driverless car startup Cruise. GM is the majority owner of Cruise, but Honda Motor Co., Ltd. (HMC), SoftBank Group Corp. (SFTBY), and others have stakes in the company. Microsoft's investment will be over $2 billion, according to The Wall Street Journal.

Ford, for its part, is a shareholder in Rivian, and its stake in the company has appreciated along with other pure EV plays as the market searches feverishly for the next Tesla. More importantly, Ford's investment in Rivian has a co-development angle for electric pickups in addition to Ford's multi-year, multi-billion investment plan for its own EV capacity.

Delayed Recognition

In reality, all the major automakers have been putting serious cash as well as extensive experience and engineering into driverless cars, EVs, and various combinations of other transportation technology – and they've been doing it for some time now. The recent interest in GM and Ford is delayed recognition of the fact that these companies have a number of advantages when it comes to a production pivot to EVs that the pure EV plays lack. One advantage is obviously the developed supply chains, production knowledge, and economies of scale these companies enjoy.

Arguably more important, however, is the fiscal discipline that these established firms will bring to the EV space as they move to production. Long-time vehicle manufacturers understand how to control costs and build margins into new production lines. This fiscal discipline could see the established manufacturers shoot far ahead of newer rivals in terms of profitability if not market excitement.

The Wider Field of Vehicle Makers

It is good to see GM and Ford get some recognition for their efforts to pivot into the EV market while using their traditional production lines to fund these new projects. That said, GM and Ford are just part of the global automobile market. All those same advantages apply to Toyota Motor Corporation (TM) and Volkswagen AG (VWAGY), among others. Toyota has sold 15 million hybrid electric vehicles between the launch of the Prius in 1997 and January 2020, and the company has stated that hybrid vehicles are a mid-step as it works to lower the costs on battery-powered electric vehicles. These facts should be sobering to enthusiasts of pure EV plays, but run-ups in the pure EV stocks like Tesla suggest otherwise.

The Bottom Line

There are a lot of different investment outlooks swirling around the automobile industry. Some investors clearly think Tesla is far ahead of everyone else and will own the EV market thanks to its first mover advantages. Other investors are betting that Tesla's success will lift similar technology-focused vehicle startups despite the fact that profit and sometimes a marketable product remain a ways off. Now there are also investors looking at the incumbent giants in the space and recognizing that they have a good chance of using structural advantages to pivot into the EV space in a big way. While it is hard to say which investment thesis will be right, the market has at least started to admit that the latter is as good a possibility as the other two scenarios.