Last week, we discussed how a stock might remain undervalued or overvalued without a clear catalyst to push it in a particular direction

While a high valuation often raises concerns, it doesn’t necessarily mean a stock will decline soon.

Just as a cheap stock isn’t guaranteed to rise, an expensive one doesn’t have to fall immediately.

What matters is the market’s reaction to key developments, and NVIDIA (NVDA) continues to benefit from positive catalysts.

The stock remains near its all-time high, largely due to ongoing strength in AI investments and partnerships.

The combination of continued AI adoption, growing infrastructure investments, and strategic partnerships has kept NVIDIA’s valuation high.

While NVIDIA appears expensive but lacks a clear reason to decline, Ford Motor (F) looks undervalued but is weighed down by negative catalysts.

The company is struggling with the transition to electric vehicles (EVs), with its EV segment burning massive amounts of cash.

Operational inefficiencies, including repeated delays and cancellations of EV products, have worsened Ford’s market position.

The company has also faced significant quality control issues, leading the industry to recalls.

Internationally, Ford faces increasing pressure from Chinese EV manufacturers that are rapidly expanding and undercutting legacy automakers.

Chinese EV makers reported record-breaking deliveries for December, fueled by their ability to offer competitive pricing.

Companies like BYD, Li Auto, XPeng, and NIO showcased impressive growth in the month, alongside smaller players such as Leapmotor and ZEEKR Intelligent.

Ford faces growing challenges as these Chinese automakers expand their reach. 

Chinese EV makers have been leveraging lower production costs and targeted subsidies to dominate their home market and increase exports.

For example, a government-backed subsidy of 20,000 yuan (roughly $2,740) for switching from gas-powered to electric vehicles played a significant role in boosting sales from July to December.

The extension of such incentives and fierce price wars is why Chinese EVs are increasingly appealing to cost-conscious consumers.

Furthermore, these EV makers are aggressively expanding into international markets by selling vehicles at a loss to capture market share.

Xiaomi, for instance, lost approximately $9,200 per car sold despite the strong demand for its SU7 model, priced at around $30,000.

Government subsidies and financial support largely offset these losses, enabling companies to continue operating despite negative margins.

The Chinese government’s strategy involves supporting domestic EV manufacturers through subsidies and favorable policies to help them scale, gain technological expertise, and eventually dominate the global EV market.

This approach allows companies to build brand recognition and achieve long-term profitability, even if they face short-term losses.

The implications for American and European automakers are clear: Competing on price with Chinese manufacturers is a losing battle without significant adjustments.

All these issues have caused the market’s expectations for Ford to be very pessimistic. Our EEA model clearly shows this.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform return on assets ‘‘ROA’’ will fall to around 4% from 12% last year.

Ford’s shrinking margins, cash burn, and poor growth trajectory raise concerns over its future performance.

Without addressing cost structures and streamlining production, the company risks being priced out of the very markets it seeks to dominate.

Competing on technology and brand strength alone won’t suffice if Chinese automakers continue to offer comparable features at significantly lower prices.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

Today’s highlight, Ford Motor (F) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.