Tesla becomes the Most Valuable car maker in the World, but has Tesla Really overtaken Toyota?

There is news circulating worldwide which says Tesla has overtaken Toyota to become the most valuable Car Company in the World. It is a big achievement for Tesla and we should give it to Elon Musk for taking Tesla to a new level considering it was on a brink of bankruptcy years ago. But we should also keep in mind that Tesla became Number 1. Overtaking Toyota in Market Capitalization and not actually in the sales department, which is actually what matters in the playing field.

When we compare the sales figures, Tesla still is miles behind Toyota in a Global market and even in the US, the primary market for Tesla. But it is of no surprise as Tesla is a young Company which has fewer models to choose from for the customers and it isn’t actually a car that you would want to buy if you don’t have at least a 100,000$ in your bank account as it is a little heavy for your pocket. Tesla has positioned itself as a pioneer in producing tech advanced Electric Luxury Vehicles which meets your imagination of how a car should be like in the future. With a preview of their Super Futuristic Cyber truck, they have taken it up a notch and the average order of almost 6000 a day was being received till February 2020. On the other hand, Toyota is the people’s car. There are a lot of models to choose from, based on your taste and how much your pocket weighs. While Tesla has positioned itself for one segment, Toyota is present in almost all of them. But it isn’t much of a surprise considering Toyota came with its first passenger car way back in 1936 and since then have experimented and brought out a lot of dynamic models targeting different audiences and different market segments with different positioning strategies.

Source :Toyota Database, Wikipedia

When we look at the sales data for Toyota and Tesla, the results are incomparable. Even when we just compare the Tesla with Toyota’s HEV PHEV EV and FCEV line ups, Tesla still has a lot of catching up to do when sales are concerned. But when we only consider the pure Electric breed of vehicles, Tesla has already become a market leader and is looking forward towards the future and the way Tesla sales have been growing in the past couple of years, we can expect Tesla to a competitive level in a couple of years; which also coincides with the time the Cyber truck gets released.

Source: www.Cleantechnica.com/tesla-sales

US is the biggest market for Tesla manufactured cars and it still 9^th most purchased car in the US in 2019 with two Toyota models in front of them; Toyota Corolla and Toyota Camry, the most sold car in the US in 2019, which sold some 336,978 units in 2019. When we look at the financials of Tesla and Toyota, we can again see a vast difference in not just the revenue but also the net profit which tells a lot about a company’s performance.

Source: Toyota Financial Results 2020 presentation

When we look at the consolidated summary, we can see that Toyota has earned net revenue of almost $19 Billion in the financial year compared to last year’s $16.92 Billion dollars, an increase of almost 13%. They have been able to keep its gross margin constant shows how efficient Toyota as a company actually is. With the Covid-19 crisis going on right now, Toyota has forecasted their sales revenue to go down extensively and also expect their gross margin to go down to 2%, which was maintained at 8.2% for the last 2 years.

Source: 2020 Q1 Report, Tesla website

On the other hand, when we look at the Financials of Tesla, the situation seems to be improving considering they reported loss consecutively in the 1^st and second quarter of 2019. The losses were associated with the major restructuring that occurred in Tesla which was responsible for a loss of $117 million in the second quarter. The third quarter gave a breather to everyone as they finally registered a positive income figure, the first of the financial year 2019. Q4 continued the trend and although there was a decline compared to Q3.  If we still look at the aggregate of cumulative Net Income in the year 2019, the number bleeds in red, a negative amount of $862 million which nearly missed a billion mark.

When we compare the two financial summaries, they don’t even look comparable as Toyota is light years ahead of Tesla in every department, the total revenue, or the net income. The only thing that raises eyebrows when we look at Tesla’s Financial summary is the Gross Margin averaging more than 17%. The Year on Year gross margin saw an increase of 25% in the first quarter of 2020 although the World was on a brink of an outbreak (Covid-19 outbreak had already broken out in some parts of Asia and Europe). When the sales number increases, the profitability of Tesla would definitely increase if they reach a level of optimum utilization as well as achieve efficiency in indirect cost. But it will take a long time to achieve that and till then, Toyota will be winning the battle on the streets as well as on the financial statements.

When we look at Tesla’s stock price in the last 1 year, it has seen an exponential growth reaching an all-time high of $1208.6 in early July (Last traded price July 2nd), a more than 400% increase compared to the YOY Stock price.

                                                                                                                          Source: Yahoo Finance July 5^th 2020

Tesla began its Rally in November 2019, which coincides with the time when their all-new “Cybertruck” was announced. Although the delivery was targeted for 2021, the Cyber truck received a great response and a lot of pre-orders. After this, their stock prices started skyrocketing. The price surge was halted temporarily by the Covid-19 Crisis in which the indices worldwide suffered a drop. But late March, the stock price immediately made a V-shaped recovery and the prices started recovering again. The confidence of the market grew and we can also give credit to the successful launch of Falcon 9 by Space X, which is a company in which Elon Musk, founder of Tesla owns the majority share. In July 2020, Tesla became the biggest Carmaker in the World on the basis of Market Capitalization.

Source: Yahoo Finance July 5^th,2020

Talking about Toyota, the stock price reached the year high in November followed by good sales figures Worldwide and Camry became one of the highest-selling cars in the US market. All was going well for Toyota until the Global crisis in the form of Covid-19 hit hard. Like other stocks and indices worldwide, Toyota stocks saw a steep decline with high trade volume. But after that, the stock prices have been volatile unable to keep a singular trend with more uncertainty in the market as Toyota saw a steep decline in sales especially in the US market (Last traded price July 2nd).

With the above stock prices, the market cap of Tesla reaches a Whopping $224.176 billion while the Market Cap of Toyota is $174.586 Billion. Tesla clearly leads Toyota now in the Market capitalization and this has been publicized worldwide through Media, which is again suspected to soar the stock prices of Tesla even more as now it would attract even more attention. But apart from the future prospects, the growing car sales and future potential to be a profit-making company in the near future, rise in Tesla stock price doesn’t seem to follow other fundamentals and logic when we look at their financial statements and performance.

As far as Stock investors are concerned, Tesla has a negative Earning Per share, meaning the shareholders are actually losing money on paper rather than earning. Their PE ratio is also in Negative and aligned more towards losing than earning and they have a history of no dividend payout, so the only way people can make money out of Tesla stock is through Capital Gains and the returns far exceed any EPS or payouts of any other stocks. But this also exposes the stockholders to risk as the rise in Tesla stock prices is based on market confidence rather than fundamentals and you never know when the market confidence may pull their hands out of Tesla.

Toyota, on the other hand, is a company with a beta lower than that of the market, we can expect low volatility from Toyota stocks. The PE ratio is 7.73, which means you are paying just $7.73 for every one dollar you earn from Toyota and the EPS is 16.36, quite a high number compared to Tesla.

When we look at these data, Toyota is a Value investment, whereas Tesla is a gamble played on the basis of Speculations and Good Word of Mouth and Stockholder’s confidence in the market and from what we have seen, it is all that takes for a company to perform well in the Stock Market.

Source: Yahoo Finance

Tesla is a company that has invested a lot in the future but looking at their statements and their profit numbers, we can say that Tesla Stocks are highly overvalued and as a value investor it will be a gamble to invest in Tesla at the current point of time. Tesla has become a market leader in EV in a short span of time, but it has a lot to do to reach the stability, strength, and heritage that the brand Toyota possesses Worldwide.

But when we look at their sales growth, the interest generated among the masses, and the vision of Extra-Ordinary Elon Musk, Tesla is a company worth betting on. There are exciting times ahead for us market watchers as well as Automobile enthusiasts.

Prashant Ghimire