While other automakers have balked, Ford (F) is rolling the dice on what could be a very risky gambit: go head-to-head with Tesla (TSLA) and cut prices.
Tesla’s dramatic price cuts of its popular Model Y and Model 3 electric vehicles have upended the still nascent EV market. Though Tesla delivered a record number of cars in Q1, its margins sank as CEO Elon Musk decided to trade profits for increased market share and put the squeeze on competitors.
Competitors like GM (GM) and Volvo (VLVLY) have decided not to cut prices with their current and existing EV models — at least at this time. Ford? In addition to cutting prices of its volume EV seller, the Mustang Mach-E, back in January, the automaker has doubled down with additional price cuts announced on Tuesday, just ahead of its earnings release.
Ford slashed the base model Select RWD standard range model by $3,000 to $42,995, among other big price cuts, including cutting the Premium RWD standard range by $4,000 to $46,995. The full list of cuts is listed below.
Slashing prices comes as Ford is gearing up for the EV battle ahead — at the same time as it transitions its business from profitable gas-powered vehicles to an uncertain EV future. In its Q1 earnings report released Tuesday night (following the company’s announcement that it was “refounding,” which means it will now break out operating results across its traditional gas, EV, and commercial units), Ford revealed its Model e EV unit lost $722 million on an EBIT basis in the quarter.
And that was before yesterday’s price cuts.
“By 2025, we now expect there to be 45 EV models to be offered in the U.S. in the small-medium utility segment. It will be a very saturated two-row EV market,” Ford CEO Jim Farley said on the earnings call last night. “Against this backdrop, to ensure profitable growth, we know we have to have a fresh, compelling offering with the right cost structure, something we continue to improve with the Mustang Mach-E. We also found the customers are very loyal to full EV powertrains once they enter, but they are not brand loyal for their first purchase.”
Compelling offerings with the right cost — and securing brand loyalty — are key to Ford’s success, according to Farley. And the company is willing to pay heavy up-front costs for it.
Ford projected, during the earnings call, that this strategy will lead to a payoff. It reiterated that first-gen EVs will approach contribution margin break-even status (meaning fixed costs are covered but no profit is made) by the end of this year and EBIT profitability by the end of 2024. The Ford Model e segment is targeting an 8% EBIT margin by late 2026.
Wall Street’s reaction to Ford’s recent quarter and outlook projections was mixed.
Wells Fargo analyst Colin Langan wrote in a note to clients that Ford reiterating its profit guidance, with a $10.0 billion midpoint in EBIT, actually represents a step down from its Q1 pace from last year and would be around a $500 million hit to earnings. Langan forecast around $2.2 billion in EBIT a quarter for the rest of the year, implying a “base case exit pace of ~$8.8B for the year, & we see more downside from pricing & higher UAW labor costs.” Langan has an Underweight rating on the stock.
On the flip side, BofA Securities’ John Murphy was impressed with the quarter and reiterated his Buy rating on the stock. Murphy said results were better than forecast, driven by a “favorable mix in Ford Blue (gas-powered unit) and favorable pricing in Ford Pro,” with Ford Model e numbers coming in better than the bank had forecast. Though Murphy did note that Ford reiterating its full-year profit outlook implied some pressure in the back of this year due to “macro uncertainty and pricing power easing.”
Ford reiterating, but not increasing, its outlook may be weighing on the stock post-earnings, partly because rival GM in April boosted its profit outlook.
Nonetheless, Ford is continuing on in its path to transforming its business — and rolling the dice on price cuts as it takes its battle to Tesla for EV dominance. The shakeout of the Ford Mustang Mach-E versus the Tesla Model Y (currently starting at $47,240 in base AWD trim) will be the clash to watch.
Also: The popularity of its traditional gas-powered business may eventually help it take it to Tesla as the EV price wars roll on.
Said BofA’s Murphy: “Ford is aggressively repositioning its business model by leveraging the combined strength of its Ford Blue and Ford Pro businesses to fund its faster growing Model e business along with vital connected technology.”
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Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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Source: https://finance.yahoo.com/news/ford-v-tesla-the-ev-price-war-continues-163731100.html