Tesla, Inc. (NASDAQ:TSLA) and Toyota (NYSE:TM) may both be auto companies, but they couldn't be more different. Tesla is all about flash and style, while Toyota is built on brutally efficient manufacturing.
For investors, there's a case to be made for either company depending on what kind of risk you're willing to take and how much you'll pay for growth. But I think there's only one stock worth buying today.
Growth belongs to Tesla
There's absolutely no question that the growth title in this battle goes to Tesla. The company is rapidly expanding production and is now on pace to sell about 250,000 vehicles per year. It still has to grow about 20x to catch Toyota in annual revenue, but if you're a growth investor Tesla is appealing.
Besides growth, however, Tesla's investment thesis becomes a bit more uncertain.
Manufacturing is all about making money
The auto business, like manufacturing in general, isn't like most tech stocks Tesla is compared to: There's no recurring revenue to be had from attracting customers to your platform. If you buy a Model 3 this year it's not likely you'll buy another one next year. As a result, auto companies need to make money on manufacturing each year to generate value for investors. It's hard to argue Tesla is doing that yet.
Below is a chart of Toyota and Tesla's cash flow from operations, which should give an idea of the money being churned out of manufacturing facilities before accounting for cash going into capital expenditures. You can see that Tesla is still losing hundreds of millions of dollars each year, while Toyota is generating $38 billion of cash.
Another way to measure manufacturing efficiency is return on the capital that's been invested into a manufacturing business. You can see below that Toyota generates a solid mid-single digit return, while Tesla is losing money on each dollar it invests.
It's possible Tesla could turn these trends around, but reports of poor quality Model 3s coming off the production line don't give much hope that the company will be an industry-leading manufacturer.
Tesla's problems are where Toyota shines
It's not easy to build efficient manufacturing plants, especially in the auto industry, but that's where Toyota shines. The company invented the "Toyota Production System," which spun off concepts like just-in-time and LEAN manufacturing. These are all concepts that help companies design products and plants specifically for manufacturing, and it's efficiency from its manufacturing plants that's helped Toyota outperform rivals long-term.
Tesla, on the other hand, hasn't seemed to learn from auto industry leaders. Its design process has been rushed and haphazard, which has led to product delays, low quality, and high costs to rework vehicles coming off the production line. Based on what we know today, Tesla is nowhere near industry standards in production quality and efficiency with any of its vehicles. The Model 3 received a "Not Recommended" rating from Consumer Reports and Model X has had quality issues since Day 1. Tesla's designs continue to wow consumers, but manufacturing efficiency and quality are a weakness over and over again. It's just too bad that manufacturing efficiency is also core to making money in the auto business.
Toyota is the winner today
Until Tesla can prove it can make money building cars I will be skeptical of the company's stock. Promises of profitability, which were made after second-quarter earnings were released, will ring hollow if the company keeps losing money. In the meantime, Toyota will keep churning out cash, and is likely to maintain its position as an industry leading manufacturer. That's the stock I would bet on.