Toyota (TM) vs Tesla (TSLA): One is a better stock to buy by far

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on May 3, 2024
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  • Tesla shares have plunged by over 27% this year amid concerns about EVs.
  • Toyota has soared by over 25%, outperforming the broader market.
  • There are signs that Toyota is a better investment than Tesla.

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Tesla (NASDAQ: TSLA) and Toyota (NYSE: TM) stock prices have diverged this year as concerns about the electric vehicle industry remains. Toyota is up by 25% while Tesla has crashed by over 25%. As a result, the gap in their enterprise value has narrowed to about $100 billion. 

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Toyota vs Tesla

Tesla vs Toyota stocks

Toyota and Tesla stocks have diverged

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Tesla and Toyota are the biggest players in the auto industry. Tesla leads in market valuation and enterprise value while Toyota leads in the number of units sold. In terms of valuation, Tesla is valued as a growth company that will dominate the automobile industry in the future as the transition to EVs intensifies.

Toyota, on the other hand, is valued as a slow-growing value company. As a result, it has a trailing PE ratio of 11.3 while Tesla has a multiple of 65. 

To be sure: Tesla deserves a pricier valuation because of its market share in the EV industry and its recent revenue growth. The company grew its revenue from $24.57 billion in 2019 to over $96 billion in 2023. It also moved from an annual net loss of $862 million in 2019 to a net profit of over $14 billion in 2023.

Tesla also stands to benefit if the EV industry grows as most analysts expect. It has the most visible brand in the industry and has a pole position in charging infrastructure. This explains why Tesla is the only major EV brand that has succeeded in North America, China, and Europe. 

Why Toyota is a better investment

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However, there are three main reasons why Toyota is a better investment than Tesla. First, the company has positioned itself in the three key areas of the auto industry. It is already the best-selling Internal Combustion Engine (ICE) company in the world. It has a leading market share in all continents.

As such, the company will continue generating substantial returns if the EV industry continues slowing down. Some analysts believe that EVs and ICE vehicles will continue existing side by side in the next decades.

Second, Toyota is the biggest player in the hybrid vehicle industry, which analysts believe is the future. Data shows that hybrid sales rose by 45% in the first quarter as EVs growth slowed to 2.7%. In a recent statement, Jim Farley, the head of Ford said:

“Hybrids will play an increasingly important role in our industry’s transition and will be here for the long run. Hybrid just hit specific customer use cases.”

Third, Toyota is also aiming to become a leading player in the EV industry. As part of its strategy, the company has made a breakthrough in solid-state battery technology that it hopes to start implementing in the next two years.

Solid-state batteries are game changers in the industry because they charge fast and have a longer lifespan. 

It is also worth noting that Toyota is growing at a faster pace than Tesla. The most recent results showed that Tesla’s sales growth deteriorated in the first quarter. Toyota, on the other hand, had a 22% revenue growth in 2023. Its forward EBITDA growth stands at 13% compared to Tesla’s 2%.

Tesla vs Toyota growth metrics

Toyota is also returning money to investors through share buybacks and dividends. The company has continually reduced the number of outstanding shares from over 1.4 billion in 2019 to about 1.34 billion. It has also returned billions of dollars through dividends.

Tesla, on the other hand, has boosted its outstanding shares from 2.60 billion in 2019 to over $3.1 billion. Altogether, Toyota has emerged as a better investment than Toyota based on numerous metrics. 

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