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Better Buy: Tesla vs. Toyota Motor

By Rekha Khandelwal - Updated Jun 7, 2021 at 8:17AM

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The two stocks are poles apart for an auto sector investor.

Depending on your taste, deciding whether to buy a Tesla (TSLA 4.67%) or Toyota Motor (TM 1.71%) car could be easy. But the same can't be said for the stocks of the two companies. Just like their cars, the choice between Tesla and Toyota stock depends on your preference and investing style. Let's see how the two stocks are different and which is a better buy right now.

Production capacity

To get a sense of the difference in scale, let's go over the current and projected production capacities of the two companies. Toyota sells more than 10 million cars every year, though the number was slightly less in 2020 because of the pandemic. By comparison, Tesla sold 0.5 million cars last year. So, Toyota sold nearly 20 times more cars than Tesla last year.

Relaxed person with a mug in their right hand rides in an autonomous self-driving car on road.

Image source: Getty Images.

Tesla is focused on ramping up its production capacity with new plants planned in Berlin and Texas. If it increases its deliveries by an average 50% annually, as it is hoping, it could reach around 2.5 million cars by 2024 -- roughly one-fourth of Toyota's current capacity. It would be a laudable accomplishment for Tesla for sure, considering that Toyota is an 84-year-old company. 

By comparison, before dropping in 2020, Toyota's unit sales grew annually at an average of around 1.4% from 2016 to 2019. 

Tesla leads in the electric vehicle segment

When it comes to electric vehicle sales, Tesla wins hands down. While all of Tesla's sales are EVs, Toyota sold a mere 3,346 fully electric vehicles in 2020. However, it plans to increase the number of its EV models from four to 15 by the year 2025. Toyota also sold 48,513 plug-in hybrid electric vehicles (PHEVs) last year.

So, while Tesla works on increasing its production numbers, Toyota has some catching up to do on the EV front.

Autonomous driving 

Tesla is working hard on improving its full self-driving (FSD) features. The company, and its CEO Elon Musk, often talks about how it is progressing on that front. In the latest quarter, the company suggested that its vision-based autonomous system, which doesn't depend on radar or lidar technologies, is "nearly ready" for the U.S. market. The company already sells its FSD feature as a separately chargeable upgrade and provides "over-the-air" software updates to its customers.

Notably, Tesla's FSD feature isn't anywhere close to full autonomy right now and it may take years before Tesla could achieve it. The company's currently offered feature is only at level 2 autonomy right now. Yet, with each improvement, the feature should become more useful and valuable for drivers. 

By contrast, Toyota isn't as loud or open about its efforts in the autonomous driving segment. But that doesn't mean that it is far behind. The company is working on advancing automated driving technologies through its Toyota Research Institute in the U.S. and Japan. Recently, it also partnered with self-driving technology company Aurora. 

Toyota has already launched level 2 autonomy cars in Japan in April and plans to launch them in the U.S. this fall. Just like Tesla, Toyota is also offering over-the-air software updates in these models. So, Toyota may not be much behind Tesla when it comes to autonomous driving. 

Tesla's lofty valuation 

Even the most ardent Tesla fans find themselves in a tough spot when it comes to valuation. Tesla's market capitalization is 2.4 times that of Toyota. Its price-to-sales ratio is more than 18 whereas that of Toyota is less than 1.

TSLA Revenue (TTM) Chart

TSLA Revenue (TTM) data by YCharts

There are quite a few reasons behind Tesla's high valuation. The company has transformed an entire industry. Electric vehicles have been around since decades, but Tesla showed that they can be produced commercially and have a market of their own. Other automakers followed Tesla's lead. Tesla stock is valued as a technology company rather than an automaker.

Another key factor that may look not so important but could really be key is Tesla's branding. It has succeeded in creating such a strong brand awareness and loyalty that it can command some premium for its cars simply for that. 

Finally, Tesla has been collecting autopilot miles data for years. This is used to train a car's software for increased autonomy. Like in EVs, Tesla could lead in autonomous driving in the future. 

Yet, it is important to note that Tesla has previously missed on its expected timelines for autonomous driving. The challenges involved are complex and the technology needs to be amply tested before it could be commercialized, as it involves big risks. Tesla has done a great job so far, and it could very well continue to do so. But it has a lot to prove to justify its lofty valuation.  

And the better buy is... 

Though Tesla garners a lot of attention for its advanced driving features, right now, they aren't really any more advanced than Toyota. If there is a potential for Tesla to achieve full autonomy, the same holds true for Toyota. Toyota stock has underperformed the broader market in the last 10-year and 20-year timeframes even though the company is undoubtedly one of the top automakers in the world.

Toyota stock's price doesn't seem to fully capture its solid performance and growth over the years. The stock also offers a more than modest yield of around 2.4%. By comparison, Tesla's stock price already reflects a lot of optimism for the company's future. So, out of the two, Toyota Motor stock looks like a better bargain right now. 

Rekha Khandelwal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
$900.09 (4.67%) $40.20
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$161.31 (1.71%) $2.71

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