Tesla vs. Toyota Stock: Launching a car company is no easy feat. There are massive barriers to entry, and the competition is fierce – particularly when the goal is to disrupt personal transportation as we know it.
The engineers that founded Tesla Motors knew what they were getting into when they decided to go up against giants like Ford, General Motors, Toyota, and Honda. They weren’t concerned. They were committed to their mission: to prove that people don’t need to compromise to drive electric cars, and that electric vehicles can be better, faster, and more fun to drive than gasoline cars.
Since then, Tesla has regularly made headlines for its innovative approach to integrating clean energy and automotive technology, but investors were skeptical that the company could return a profit.
Interest started to grow in late 2013, and share prices took off in 2020. Those looking to add automotive stock to their portfolio are looking hard at Tesla’s prospects for long-term success.
Will Tesla deliver shareholder value in coming years, or would investors be better-served with a tried-and-true automotive giant like Toyota? In other words, when it comes to Tesla vs Toyota stock, which is best for smart investors?
Pros and Cons of Investing in Car Manufacturers
When considering an investment in car manufacturers, the first step is to change how you define them.
Organizations that fall into this category are those that design, engineer, and build “light vehicles”, including cars, pickups, commercial vans, and sport-utility vehicles (SUVs). That opens the door to well-established companies that date back decades – and in some cases more than a century. Toyota falls under that heading.
Within the same category you will discover a variety of new arrivals to the industry. These are disruptors who are looking to change light vehicles forever by integrating technology that increases safety and reduces emissions.
Big ideas include electric cars and self-driving or driverless vehicles. This is where Tesla comes in.
The benefit of investing in the first sort of company is strength. These organizations are well-established, with long histories of overcoming all sorts of market conditions.
The benefit of investing in the second sort of company is growth. Assuming the new generation of automakers can, in fact, disrupt the industry, they may deliver extraordinary returns to shareholders.
Of course, there are cons to any investment, and automotive stock is no exception. Some of the more established companies are struggling to keep up with the pace of change, and they aren’t quite prepared to meet new consumer expectations.
Newer companies have the same downside as any disruptor – successfully integrating new ideas into the marketplace doesn’t always work.
More than that, any organization that deals in light vehicles must be prepared for the cyclical nature of the industry. When times are economically tough, buying cars and light trucks drops way down on the list of consumer priorities.
Major sales slumps can wreak significant financial damage on businesses that depend on strong auto sales to turn a profit.
Is Tesla Stock A Good Investment?
If anyone had doubts about Tesla early on, it seems they have been proven wrong in a big way.
Tesla has had an extraordinary 2020, with share prices increasing by almost 250 percent year-to-date. That puts Tesla in the number one spot as the world’s largest automaker by market cap, with current value estimated at $263 billion.
Compare that to American auto giants Ford and General Motors, which come in around $27 billion.
Some of the recent jump in share price has to do with Tesla’s impressive results for the last quarter, which were announced on July 22, 2020.
The company exceeded expectations on nearly every metric, with sales of $6.04 billion and earnings per share of $0.50. Analysts had predicted a sales of just $5.15 billion and losses of $0.82 per share given current economic conditions.
Part of the unexpected sales figures can be credited to Tesla’s commitment to bringing the cost of purchasing its vehicles down.
The most expensive models are still priced at well over $100,000, and most of the remaining options go for more than $40,000.
This year, Tesla has managed to drive prices down on its most basic electric vehicle to a rock-bottom $35,000. However, that still doesn’t compete with the 2020 Toyota Yaris at around $16,500.
Most analysts now project continued gains for Tesla stock over the next 12 months, making the company a buy – but will it deliver better results than established rival Toyota?
Can Toyota Beat Tesla?
Toyota, along with its peers, has had a tough year. Economic disruption shuttered factories and put new and used car purchases on the back burner for billions of people.
However, Toyota, the biggest player in the industry as measured by the number of vehicles sold, did better than US manufacturers Ford and GM.
While Ford share prices went down more than 34 percent in value and GM stock declined nearly 31 percent, Toyota only lost a bit over 10 percent. That is credited, in part, to Toyota’s refusal to suspend its shareholder dividend.
The good news is that as a whole, the auto industry appears to be recovering. The Chinese auto marketplace – the largest in the world – is once again open for business.
Better still, manufacturing plants in Europe and the US have been able to reopen, and if all goes well, sales are expected to return to their previous levels by late 2021.
These factors make Toyota appealing for a number of reasons. The biggest is that share prices are somewhat discounted right now. Considering the company still plans to pay dividends, there is opportunity for investors to buy low, ride the market up, and get paid along the way.
Value and income are important, but they may not be the most important reasons to add Toyota stock to your portfolio.
Unlike many of its competitors, Toyota is hard at work on the sort of research and development that will deliver the light vehicles of the future.
It has joined forces with several Chinese auto companies in a joint venture to dramatically increase the number of fuel cell electric vehicles on China’s roads over the next five years. That sort of innovation is critical to long-term success, which makes Toyota a smart buy for investors.
Toyota vs Tesla Stock: The Bottom Line
Analysts are predicting big gains for Tesla over the next year, and that is appealing for some investors. However, the majority are sticking with Toyota for a variety of reasons.
The biggest is that Tesla’s sudden increase in value might remain stable and continue to rise. However, volatility goes both ways, and it’s certainly possible that a sharp drop is forthcoming.
Tesla’s stock prices reflect transient sentiment, while Toyota has established a long-term track record. Toyota has a proven history that adds a level of security Tesla can’t match. Investors looking for massive gains – and willing to take on higher risk along the way – might find Tesla stock an exciting opportunity. For the average investor in search of steady, reliable returns, Toyota is a far better choice.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.