Could Ford become another Apple or Tesla?

Cars are becoming more like smartphones - once simple consumer products, but now equipped with software - and this transformation is expected to bring lucrative returns.

Automakers are trying to convince investors that as cars become increasingly intelligent, software will be a crucial component of their future.

For example, Tesla fans believe that the company could become like Apple.

Ford is also heading in that direction.

Ford Pro

Ted Cannis, head of Ford's automotive business, said, "The opportunities brought by software-driven experiences are greater than almost anyone can comprehend."

Ford's commercial division, Ford Pro, started reporting its performance separately from early 2023, which has amazed investors.

In the second quarter, Ford Pro achieved an operating profit of $2.4 billion with an operating profit margin of 15.3%, higher than the 9.2% profit margin of Ford's automotive business.

Cannis believes that as cars become more closely connected to the internet, the operating profit margin will increase and the sales cycle will weaken. Cannis said, "In the second quarter, we had 450,000 paid subscriptions." This number represents a 60% year-on-year growth and comes from Ford's 125,000 commercial customers in the United States and 140,000 customers in Europe.

Ford, like Apple or Tesla

Cannis hopes that by 2026, 20% of Ford Pro's revenue will come from components and services, including subscription services. This proportion will be higher than the current level of around 15%.

If Ford Pro's profit and loss statement reaches 20%, it may resemble Apple's profit and loss statement. Around 2007, when Apple launched the iPhone, services such as the Apple Music Store accounted for about 10% of its sales.

Over time, the business structure has changed, and in the 2022 fiscal year, services accounted for about 20% of sales.

The growth of the service business has created significant value for Apple, which has an expected price-to-earnings ratio of about 29. Tesla's expected price-to-earnings ratio is about 60. The growth of electric vehicles is part of the reason, but the potential of Full Self-Driving (FSD) is also crucial.

Musk is betting that people will pay a monthly fee to use its autonomous driving software. This will create a high-profit aftermarket revenue stream that the industry has never seen before.

Meanwhile, Ford's price-to-earnings ratio is about 6. Ford could become another Apple or Tesla, which is an extension, but Cannis would be satisfied with being seen as another manufacturing stock.

Automotive investors may be pleased with such a price-to-earnings ratio.