Why Toyota May Have the Best Strategy in the EV Race

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Over the last four quarters, Tesla generated total revenue and earnings of $96 billion and $15 billion, respectively. Toyota’s revenue and earnings are roughly three times larger at $299 billion and $44 billion. Yet Tesla’s market cap is more than double that of Toyota.

Tesla shares have soared since going public, while Toyota and other major auto manufacturers’ shares have meandered along. Since going public in 2010 at $1.59 (split adjusted), Tesla shares are up nearly 12,000%. That figure is more stunning, considering it’s down 50% since late 2021. The graph below, charting the two stocks since 2018, highlights Tesla’s outperformance versus Toyota and the extreme volatility of its returns. As shown in the second graph, 40-50+% drawdowns are not uncommon for Tesla.

Tesla shares have outperformed Toyota’s and the market because of the significant growth of EVs, a robust outlook for EV market penetration, and forecasts that Tesla will maintain its lead role in manufacturing EVs. Tesla’s market cap relies on all three coming to fruition.

What if one or more of those do not occur? Might hybrids be the preferred technology until a more efficient battery evolves? Will EV competition from established and new auto manufacturers upend Tesla’s market share? Maybe most critical, could Toyota, not Tesla, be at the forefront of a significant technological advance for automobiles?

With a price-to-earnings ratio of 9 for Toyota and 72 for Tesla, the answers to our questions have critical implications for shareholders of both stocks.  

EVs VS ICE

Sales of EVs are multiplying. The latest data shows that EVs will account for 9% of all domestic new car sales in 2024. That leaves plenty of upside for EV manufacturers if the U.S. follows the path of other countries like Germany and China, in which EVs represent approximately a third of all new car sales.

While the transition from internal combustion engines (ICE)…