In this article, I evaluated two auto stocks, Nikola Corporation (NKLA) and Toyota Motor Corporation (TM), to determine which has the potential for substantial returns. After comparing the fundamentals of these stocks, we believe TM is a solid buy, while NKLA is best avoided for reasons explained throughout this piece.
New auto sales in the U.S. witnessed a significant rebound in 2023 after experiencing a decade-low in 2022. Several factors, including pent-up demand, improved inventories, and generous incentives, drove the surge in sales. According to data by Wards Intelligence, U.S. new vehicle sales last year finished at nearly 15.5 million units, of which EVs, including hybrids, made up around 17%.
New vehicle sales reached the highest since 2019 and exceeded approximately 13.9 million in 2022, as per figures from consultant Cox Automotive.
“This is the third consecutive year in which U.S. consumers spent more than half a trillion dollars buying new vehicles, J.D. Power stated in a report last month.
According to a report by Market Research Future, the global automotive industry is projected to reach $6.07 trillion by 2030, expanding at a CAGR of 6.9% during the forecast period. Surging demand for EVs worldwide and rapid digital transformation would fuel the market’s profitability and growth.
Environmental concerns, rising gasoline prices, and government incentives, among other factors, are encouraging people worldwide to switch to EVs. As per estimates from Kelley Blue Book, a Cox Automotive company, a record 1.2 million EVs were sold in the U.S.
Further, the Cox Automotive Economic and Industry Insights team expects 2024 to be “the Year of More” for EVs, with more new products, more incentives, more inventory, more leasing, and more infrastructure. The team forecasts the EV share of the U.S. market this year to reach 10%.
The automotive industry has seen a tremendous transformation, with the recent technology trends disrupting how value is delivered to customers. Advanced technologies, such as artificial intelligence (AI), the Internet of Things (IoT), machine learning (ML), and data analytics, are being adopted by auto manufacturers to optimize operations and enhance customer experience.
With an enhanced focus on sustainability and eco-friendliness, manufacturers are increasingly using green technologies, like biofuels and hydrogen fuel cells, to lower their carbon footprint.
Therefore, auto stocks NKLA and TM will likely benefit from the industry’s promising growth prospects. Given sound fundamentals and a bright outlook, it could be wise to invest in TM, but struggling NKLA is best avoided now.
NKLA has declined 46.7% over the past three months, while TM has surged 9.5%. NKLA has slumped 47.8% over the past six months, compared to TM’s 23.1% gain. In addition, NKLA has plunged 69.2% over the past year, while TM has climbed 40.4%.
Here are several reasons why we think TM could perform better in the near term:
Latest Developments
On December 20, 2023, NKLA, via the HYLA brand and FirstElement Fuel (FEF), a global leader in hydrogen refueling station solutions, formalized a definitive 10-year agreement to refuel Nikola’s hydrogen fuel cell electric truck at FEF’s hydrogen refueling station in Oakland, California.
This partnership unifies both the companies’ commitment to driving the adoption of hydrogen fuel cell electric vehicles and marks a significant step toward a greener and more sustainable future.
On November 27, TM unveiled its newly designed NASCAR Cup Series (NCS) Toyota Camry XSE race car which is expected to make its debut in the 2024 NCS season. The Camry XSE Next Gen follows the Toyota Camry TRD Next Gen, which produced around 18 victories and 25 poles in the last two seasons of competition.
“The 2024 Camry XSE race car will properly highlight Toyota’s attention to detail as has been showcased in the new street version Toyota Camry. We are excited to bring this car to the race track and continue to achieve success with it for years to come,” said Paul Doleshal, group manager of motorsports, TMNA (Toyota Motor North America).
Recent Financial Results
For the third quarter that ended September 30, 2023, NKLA reported total revenues of negative $1.73 million, compared to $24.24 million in the same quarter of 2022. Its gross loss widened by 316% year-over-year to $125.50 million. Also, the company’s loss from operations for the quarter came in at $226.17 million.
Furthermore, Nikola’s net loss worsened by 80.2% from the previous year’s period to $425.76 million, and its net loss per share was $0.50.
TM’s sales revenues increased 24% year-over-year to ¥11.43 trillion ($78.52 billion) during the fiscal 2024 second quarter ended September 30, 2023. Its operating income grew 155.6% from the year-ago value to ¥1.44 trillion (9.89 billion). The company’s income before income taxes came in at ¥1.80 trillion ($12.37 billion), up 121.7% from the prior year’s quarter.
In addition, net income attributable to TM rose 194.3% year-over-year to ¥1.28 trillion ($8.79 billion), and earnings per share attributable to TM was ¥94.51, an increase of 197.9% year-over-year.
Past And Expected Financial Performance
Over the past three years, NKLA’s revenue has increased at a CAGR of 499.9%. The company’s total assets have grown at a CAGR of 0.4% over the same time frame. However, its tangible book has declined at a 20.4% CAGR over the same period.
Analysts expect NKLA’s revenue for the fiscal year (ended December 2023) to decline 22.3% year-over-year to $39.49 million, and the company is expected to report a loss per share of $1.19 for the same period. Furthermore, for the fiscal year 2024, Nikola is estimated to report a loss per share of $0.51.
TM’s revenue has increased at a CAGR of 16.8% over the past three years, and its EBITDA has improved at a CAGR of 22.3%. Its net income and EPS have grown at CAGRs of 39.3% and 41.1% over the same timeframe, respectively. Also, the company’s total assets have increased at a CAGR of 14% over the same period.
For the fiscal year ending March 2024, TM’s revenue and EPS are expected to increase 9.4% and 668.2% year-over-year to $302.43 billion and $20.49, respectively. Likewise, analysts expect the company’s revenue and EPS for the fiscal year 2025 to grow 3.2% and 2.1% from the prior year to $312.07 billion and $20.92, respectively.
Profitability
TM’s trailing-12-month revenue is 8,979.9 times what NKLA generates. Moreover, TM is more profitable, with a trailing-12-month Return on Equity (ROE) of 12.69% compared to NKLA’s negative 159.83%. TM’s trailing-12-month Return on Assets (ROA) and Return on Total Capital (ROTC) of 3.86% and 4.14% compared to NKLA’s negative 58.77% and negative 49.94%, respectively.
Valuation
In terms of trailing-12-month Price/Sales, TM is currently trading at 0.96x, 93.8% lower than NKLA, which is trading at 15.53x. TM’s forward EV/Sales of 1.52x is 93.9% lower than NKLA’s 24.81x. Moreover, TM’s trailing-12-month Price to Book of 1.24 is lower than NKLA’s 1.21.
Thus, TM is relatively more affordable.
POWR Ratings
NKLA has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. Conversely, TM has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NKLA has an F grade for Sentiment, in sync with its poor financials and unfavorable analysts’ estimates. On the contrary, TM has an A grade for Sentiment, consistent with its solid financial performance in the last reported quarter and optimistic analyst expectations.
In addition, NKLA has an F grade for Stability, in sync with its 24-month beta of 2.14. On the other hand, TM has a B grade for Stability, justified by its 24-month beta of 0.61.
Of the 52 stocks in the Auto & Vehicle Manufacturers industry, NKLA is ranked #51, while TM is ranked #24.
Beyond what we’ve stated above, we have also rated both stocks for Momentum, Quality, Value, and Growth. Click here to view NKLA Ratings. Get all TM ratings here.
The Winner
The U.S. auto sales rebounded last year, marking a return to normalcy for the auto industry, which has been on a roller coaster since the pandemic. Given the growing demand for new vehicles, widespread adoption of EVs worldwide, and rapid digital transformation, the industry’s long-term outlook appears promising.
Hence, fundamentally sound auto stock TM is well-positioned to capitalize on the industry’s tailwinds. However, given its weak financials, low profitability, elevated valuation, and bleak growth outlook, NKLA is best avoided now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Auto & Vehicle Manufacturers industry here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
TM shares were unchanged in premarket trading Friday. Year-to-date, TM has gained 6.31%, versus a 0.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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