Market Cap Differences

From the May 13 2024 edition of Automotive News:
Column: Why does Wall St. value Tesla 40% higher than Toyota?
Both face headwinds, but Toyota earned twice as much as Tesla in the most recent fiscal year.

I studied finance in college, and one of my favorite classes was investment analysis: measuring a company’s or a stock’s performance relative to peers, evaluating whether that might indicate future performance and weighing it against the investor’s objectives.

It was a very neat and logical model — and a great way to try to understand that part of the global economy, which was becoming a bigger part of the news cycle as more baby boomers were investing for retirement and more companies were offering stock to align employees’ interests with those of management and ownership.

But over the past quarter century of covering the auto industry, it’s hard to argue that stock markets are built on fully rational models of expected company performance.

Consider Toyota and Tesla: the world’s biggest automaker and the one most highly valued. Toyota makes twice as much money, but Tesla is valued more than 40 percent higher — almost $550 billion to Toyota’s $380 billion. (For comparison: GM and Ford are each worth about $50 billion.)

A few weeks ago, before Tesla’s first-quarter earnings report, the two companies were becoming almost equal in terms of market capitalization — the total number of shares outstanding times the share price.

It’s effectively a proxy for what it would cost to buy the company. And the gap was down to $83 billion, Bloomberg reported.

Tesla stock

What happened since then?

Tesla earned less than analysts had expected in the first quarter — its net income fell by about half — but its stock went up about 10 percent. Investors were apparently relieved that the company still plans to introduce a lower-priced EV, after Reuters had reported that the project was on ice.

CEO Elon Musk did indicate that the low-cost vehicle — commonly called the Model 2 by outsiders — might not be the breakthrough that was originally intended. He said in the earnings call that “more affordable” models would use a current platform and production lines — more incremental progress than had been anticipated. And he stressed that self-driving cars would be “the main driver of our value.”

U.S. prosecutors are examining whether Tesla committed securities or wire fraud by misleading investors and consumers about its self-driving capabilities, Reuters reported, citing three people familiar with the matter.

If Tesla can unleash a global fleet of autonomous vehicles before Waymo or anyone else, it would undeniably make it an extremely valuable company. But without a single permit to operate driverless cars, it looks like that growth phase is a ways off.

As Gartner’s Mike Ramsey explained on a recent episode of the Shift podcast: Musk has a knack for saying things that get investors excited.

Pivotal fiscal years

To be fair, Tesla had been on a bit of a roll — in part by slashing vehicle prices to push volumes ever upward, even if not at the 50 percent per year rate Musk had set as a target. In the fourth quarter of 2023, Tesla reported net income nearing $8 billion, bringing its full-year total to almost $15 billion.

That’s impressive. A lot of companies would be glad to net out at $15 billion from 2023.

But then its first-quarter net income fell 55 percent to $1.13 billion — and the stock went up.

Then there’s Toyota, which earned $27 billion just from April through December.

Last week, it published its fiscal year results: record net profit, operating profit, revenue and vehicle sales.

Toyota earned a whopping $32.7 billion in net income — a record that more than doubled the previous year’s profit.

CEO Koji Sato did warn that the company plans to dial back a bit this year, so its suppliers, dealers and employees can find a more sustainable pace of life.

It’s kind of an inconceivable approach for an automaker. But in the wake of scandals at its Hino heavy-truck business, Daihatsu minicar business and Toyota Industries subsidiary, which makes lift trucks, auto components and other machinery, the automaker — despite its extraordinary results — is feeling pressure similar to that of its unintended acceleration issue in the U.S. a decade and a half ago.

Despite forecasting a slowdown in sales and higher incentives cutting into profit, investors didn’t punish Toyota, either. Its stock rose 2.4 percent the day after it reported earnings. They may be thinking about Toyota’s tendency to underpromise and overdeliver.

But investors continue to value it at about $175 billion less than Tesla.

Markets provide their own justice and reality. Some investors favor Toyota’s hybrid-heavy approach; others prefer Tesla’s EV, AI and robotics story.

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