The stock market is making new all-time highs seemingly every day. Over the past 12 months, the Nasdaq Composite is up 33.8%, but it hasn't been a good time for most electric vehicle (EV) investors.
Tesla (TSLA +3.01%) is down 4%, and Rivian Automotive (RIVN +1.83%) is down more than 19% over that same time frameNAS. Year-to-date doesn't get any better, as the Nasdaq is up 5.1%, while Tesla is down 19.5%, and Rivian is down 30.5%.
Let's look at what is holding these companies back, and what needs to happen to turn things around.
Image source: Getty Images.
Tesla's challenges
It's not hard to see why Tesla is down. Its top- and bottom-line growth is slowing, and its 2024 guidance doesn't point to a reacceleration anytime soon. Operating margins are down due to price cuts and sustained long-term investments in manufacturing expansions and research and development.
Tesla has yet to monetize artificial intelligence in a meaningful way. Its self-driving tech has improved but isn't close to the sophistication needed for autonomous driving and a robotaxi business -- which would revolutionize the ride-sharing and food delivery industries.
Tesla is a growth stock with an expensive valuation. It has to grow at a rapid rate to justify that valuation, which is hard to consistently achieve in a cyclical industry. The ongoing threat of competition from established and new automakers adds more pressure.
NASDAQ: TSLA
Key Data Points
Rivian's challenges
Rivian has done an excellent job growing its sales volume while investing in its long-term growth. Its greatest challenge is a race against the clock to reach positive free cash flow so that it can stop depending on its cash reserve to fuel operations.
Rivian's losses are narrowing, but it could still run out of cash within the next two years. It has developed impressive technology and a strong brand. Its second-generation platform, known as the R2 line, will lower the sales price of its passenger vehicles and should help Rivian tap into a larger customer base.
The company has a lot of potential but is also quite risky. If it runs out of dry powder before reaching positive cash flow, it would have to tap into the capital markets through stock dilution or debt financing -- both of which are not ideal given Rivian's pummeled stock price and higher interest rates.
What's working in the auto industry
Over the last three years, the Nasdaq Composite is almost flat, Ferrari, Toyota (TM +2.16%), Honda, and Stellantis have all outperformed, and the rest of the auto industry has underperformed.
Let's look at what the world's best-selling car brand, Toyota, is doing right compared to Tesla and Rivian.
Toyota's strategy is a blueprint for success
In early February, Toyota reached a $300 billion market cap for the first time in company history. The stock is up 24% year to date and 59.2% over the last year. That's a huge move from a historically stodgy legacy automaker.
Toyota's strategy is working. The company is growing its top and bottom lines much faster than the industry by investing heavily in hybrids instead of purely battery-powered EVs.
The first nine months of its fiscal year 2024 ran from April 1 to Dec. 31, 2023. And in that period, Toyota grew sales by 23.9%, and its operating income more than doubled, taking its operating margin from 7.6% to 12.5%. For context, Tesla's 2023 operating margin was just 9.2%, although it was a far higher 17% in 2022.
Toyota and its Lexus brand sold 7.91 million vehicles in the first nine months of fiscal year 2024, a 9.7% increase from the same period last year. Electrified vehicles now make up 35.9% of Toyota and Lexus sales volume. Hybrid EVs make up 33.5% of Toyota and Lexus sales volume, while plug-in hybrid EVs, battery EVs, and fuel cell EVs account for just 2.4% of sales.
Toyota sold more hybrid EVs from April to the end of December 2023 than Tesla's total vehicle sales in all of 2023.
It's not like hybrids are a new concept: The Toyota Prius was introduced in Japan in 1997 and North America in 2000. The company's hybrid lineup includes 10 different models (led by the Corolla, Camry, and Prius), with the highly anticipated 4Runner hybrid coming soon.
Toyota is growing sales and margins by offering consumers a variety of solutions. It expects battery EVs to play a growing role in its sales mix and is investing accordingly. But it isn't taking an all-or-nothing approach. In sum, the company's playbook is working right now, and it makes pure-play EV makers or legacy automakers that are slow to change look bad.
Proceed with caution
The multi-decade runway for EVs remains intact. But for now, demand hasn't sustained the growth rate that many investors had hoped for.
In the short term, stocks can fall in and out of favor based on what is working. And right now, Toyota's dual approach is working the best.
Its success makes it harder for Tesla to blame a cyclical slowdown in the auto industry for its weaker performance. It also casts doubt on the viability of a pure-play EV business model and whether the pace of EV adoption will justify Tesla's expensive investments to expand its manufacturing output.
Even with its lower margins, Tesla is still a highly profitable business. It's just that the stock is expensive, with a 46.5 price-to-earnings (P/E) ratio. Toyota has just a 10.3 P/E even after the stock's recent run-up.
Rivian is more vulnerable to a slowdown in the EV industry since it is a lower-volume, newer company catering specifically to the higher-end part of the market.
For Tesla and Rivian to stop underperforming the Nasdaq, they must prove that they are delivering a product that is better than the competition and at a price point that consumers will go for.
Many folks would argue that both companies have already done that. But Tesla's pricing power has eroded lately. The bigger question is how its market share will be impacted by other pure-play EV makers with higher sales volumes, like BYD, and if consumers gravitate to Toyota's hybrid solutions.
Tesla and Rivian face short-term and long-term challenges that don't look like they will ease. Both stocks are worth buying if you believe in the products and the long-term growth of EVs. But only if you have a high risk tolerance and are prepared to endure what could be a choppy and volatile period for both stocks.
