Toyota Stock is Trouncing Tesla. Really.

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At the beginning of '23, there was a ton of terrible things going on at Tesla. Elon was taking over Twitter and they were cutting prices and they still didn't have a low-priced car, but it was $100. And it was to the point where it was like, I think this is as bad as it can get.

Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard, that's our pal Al Root, senior writer at Barron's. My colleague is going to talk with us about cars, Tesla, Toyota, electric, hybrid, New York Car Show. What else, Jackson?

VW bus.

Not the new one. There's a new one. We'll get to it.

Not the Mystery Machine.

Was that a VW bus?

No.

Now I got to Google it. Listening in is our audio producer, Jackson. Hi, Jackson.

Hi, Jack.

What did you learn about the Mystery Machine?

It's based on a mid-'60s Chevy G-body panel or a Dodge A100. Both Seems similar in appearance.

That was my next guess. We're talking about cars. We've got a question from a listener. Let's get to that right away. Who do we have?

Yeah, we have Tom.

Hey, Jack, it's Tom of the Car Stuff Podcast with a car-related question for you. With the dollar at near all-time highs relative to the yen, is this a good time to invest in a company like Toyota, which does a great deal of business in the US but is headquartered in Japan? I ask not just because this makes imported Toyota vehicles more profitable, though I realize that the company builds most of its American market products here in the States, but because this would seem like a great time for Toyota to repatriate funds accumulated in the U.S. and earn some additional revenue because of the exchange rate gap. Anyway, I love your show and I learn a lot from it. Thanks a lot.

Thanks for the great question, Tom. I wrote a little bit about Toyota stock this past week in Barron's. It was a comparison of Toyota and Tesla. Toyota stock has outperformed Tesla by more than 90 percentage points over the past 2 years. That might be surprising to people who still think of Tesla as a perpetual high-flying stock. It's really not lately. Over the past couple of years, Tesla is down more than 40%. It's to the point where, you know how we've been talking about the Magnificent Seven, the big 7 tech companies that have been driving the market? Well, Now people say the Big Six because they don't include Tesla among the 7 anymore.

Ouch.

So, Tom, I'll tell you a bit about what's happening for Tesla and then I'll come to Toyota. Basically, electric vehicles have been losing some of their oomph, some of their growth. Mizuho Securities just cut its 2024 electric vehicle growth projection to 15%. It was at 25%, and I've seen industry forecasts that were much higher than that. Mizuho says that EV inventories look bloated, and they say affordability is a challenge. They've cut subsidies in the US and Europe. Insurance costs, they say, are 25% higher for electric vehicles than for comparable gasoline cars. So it seems as though early adopters already have their EVs, and the folks who are next in line to buy them are more cost-conscious. And when it comes to cheap EVs, China is leading the way. One of its manufacturers, BYD, recently passed Tesla in volume. Tesla has cut costs, but it won't introduce a new cheaper model until next year. And so that has created an air pocket for growth at Tesla. If you look at projections for deliveries, they're down. If you look at projections for free cash flow, they are way down. And so that's Tesla. Now, Toyota, kind of the opposite is going on there. There has been what JPMorgan calls a tidal change in the U.S. car market, with hybrid vehicle demand taking off. Hybrid has recently been growing faster than electric vehicles, and JPMorgan predicts more of the same— 22.6% hybrid vehicle growth this year. Especially small SUVs, and Toyota dominates there with its RAV4. This year, Toyota is going to introduce its popular Camry sedan in the U.S. in a hybrid version only, which gives you an idea of how confident it is about demand for hybrid going forward. Hybrids get 50+ miles to the gallon on some models. That's not going to impress plug-in purists, but it is profitable. The Prius that Toyota makes, that's been profitable for more than 2 decades, and Toyota says it earns higher margins on today's hybrid vehicles than it does on non-hybrid versions. The company gets more than a third of its revenue from hybrid vehicles, and it has very little exposure to pure electric vehicles. So its sales mix is really just about perfect for this moment. And that's why the stock has been doing so well. The stock was recently up 115% over the past year. That's for the ordinary shares that trade in Japan. There are also American depository receipts, ticker TM on those, and they were up 84%. And the difference between those two returns gets to something that you had asked about, Tom, the currency. The yen recently hit a 34-year low versus the dollar. Basically, Japan has held its interest rates near zero for decades to try to boost its economy. Many developed economies joined it for a while there, but they've since begun raising rates. Japan was a holdout, but it recently raised interest rates for the first time in 17 years. It went from— and brace yourself for this change— from an overnight borrowing rate of -0.1% to a range of between 0 and positive 0.1%. It went from barely perceptible negative to barely perceptible positive.

Sounds like a turnaround story.

Well, we'll see what's next for rates, but there's been for the longest time this carry trade where traders have taken advantage of the very low rate, the differential between the very low rates in Japan and the higher rates elsewhere. And so is this the beginning of the end for that? Well, I guess not quite yet, but it is an interesting development. We'll see. So if you're a US-based investor who's held Toyota shares over the past year, you had great timing on the stock. You were in the right place at the right time. You've gotten quite a haircut on the currency exchange. But for Toyota, as you point out, Tom, that cheap currency could help it with exports, but that's offset by cases where it manufactures overseas goods in those same overseas markets, making Toyotas in the US, for example. So the answer to your question about should you buy Toyota stock for the currency effects is I don't know. It's always a tricky thing to do because you have to factor in to what extent companies are taking actions to manage currency swings. But maybe you buy Toyota stock for how well Toyota is doing. For a while there, Toyota was in the industry's naughty corner because it was the only company that hadn't really detailed a plan for plug-in electric vehicles. It was not as all-in as the others. While Ford was out there talking about its Lightning pickup truck and GM was talking about its Volt and Tesla was leaving all of them in its dust, Toyota just kept making hybrids. And it seemed like they were a few steps behind. But now that the early adopters have their EVs and growth there has slowed, hybrids are hot. You don't have to worry about range anxiety or new wiring in your house, and you can save a bit on gasoline, do a little better for the environment. The switchover to all-electric vehicles still feels somewhat inevitable, so Toyota will eventually need a plan, but It thinks that the change will take longer than people suppose. I've seen industry forecasts that electric vehicles will be half the market by the end of the decade. Toyota says it's more like 30%. Now, that's what I can tell you, but I think what we should do is bring in Al Root from Barron's, who writes a lot about cars and who is just back from a preview of the New York Auto Show. He can tell us about what he saw there. Jaxson, anything to add?

I have a Tesla and there's a Supercharger right near my house. And there's also a hydrogen fueling station right near the Supercharger. And I've noticed there's just been lines of cars of these. They almost look like Lexuses, but they're Toyota Mirais. They run on hydrogen power. But everyone seems to be upset because, one, it costs around $100 to fill up those things. And two, there's only one. Pump in all of, it appears, all of West LA that's working.

What they need is right in between the two, a helium station. So while they're waiting for the hydrogen, they could at least do the funny voices.

I think you're on to something.

Okay, let's take a quick break and we'll be right back with Al.

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Al Root joining us from Barron's, where you are a senior writer, where you often write about cars. And you, by the way, how's your mouth?

So the mouth update, no more numb tongue.

Good.

A little bit of a sore throat. You know, they jam their hands in there for an hour. It's not good, but I'm feeling good.

We should explain. We were just on television together. Barron's does a TV show. It's called Barron's Roundtable. It airs Fridays at 7:30 PM and Saturday and Sunday at both 9:30 AM and 10:30 AM. And I was guest hosting. You were on the show. You were talking about cars. You had just come from the dentist and you said you had a numb tongue, but you bravely did the show anyhow. And I don't think anyone could tell except for the fact that I told everyone.

So, yeah, I don't know if it's a good thing or a bad thing. No one can tell. I sort of slur everything. If you slur everything, you have no problems.

Tell us about the car show. There's a New York car show and you got kind of a sneak peek of it. What are you seeing there? First of all, tell me about it. Tell me about some jazz. Let's start with the ear candy first. Tell me about some jazzy vehicle, something expensive?

Yeah, I can give you 3. I like car shows, car shows for the public more than for, you know, investors per se. You know, you're more likely to talk about, you know, ceramic brakes than free cash flow, but always good to see the product. You know, the best one, you know, this Rimac Nerva hypercar, $2.2 million car, all electric. They're only going to make 150 of those, but it's still fun to see on the—

I'm not sure my audio is working. I thought you said $2.2 million. Is that the Is that the Novocaine? Did I hear that correctly?

No, I mean, you know how some of these cars get made. Like they're only gonna make 150. The market for $2.2 million cars is wildly small, but it's fun to look at them. They don't ever impact stock prices. But what do you get? Your Bugatti Veyron and you got your Rimac. You know, there's a million dollar Lotus.

It's not a good deal for a car, but it might be a good deal for show-offy stuff, right? Because you could spend, If you're super rich, you can spend $2.2 million on a lot of things where you won't raise an eyebrow. But if you spend it on this car, there are only 150 of them. I mean, maybe that's something.

Yeah, that's the deal.

All right, put me down for 2.

You know, it's funny, like you don't really ever get, like when you're at the shows and stuff and you know, the higher-end cars, you don't like get to walk up to them and sit in them really because they have like people and they're like, whoa, whoa, whoa, you don't get to sit in this. This is just for show. Don't touch it, little guy. And then you have to move on. The car I thought was, you know, my favorite of the supercars, it's a $300,000 Mustang GTD. It's kind of like a street-legal race car. This is like Vin Diesel's car in, you know, Fast and Furious 11 or something like that. You know, Ford's big presentation this year is it's the 60th anniversary of the Mustang. We have a Mustang for everybody. $30,000 Mustang is the base price, and you can go all the way up to $300,000 if you want something with like 800 horsepower and you want to drag race down the streets of, I don't know, Westport or Westchester County.

And you learned a fascinating fact about the Mustang. We haven't really been able to get a second source on this, but go ahead and share it with folks anyhow.

One of the people associated with Ford at the auto show made the line, "One in five Americans have been conceived in a Mustang." I'm pretty sure he was joking. We think it was just to point out how long the Mustang has been around and how American, you know, the Mustang muscle car is.

Well, speaking of Americans being conceived in vehicles, what about the VW bus, the classic bus is coming back. And what does it look like? What did you see? Tell us about it.

You know, so that stub-nosed, you know, no-hood VW bus is back in all-electric form. It's on sale in Europe. It's coming on sale in the US this year. They brought it to the show. It's pretty cool. It's called the ID.Buzz. We rode around Midtown in it. Like to point out, we probably went 8/10 of a mile and spent about 40 minutes in the car because we're going crosstown.

So that's your new Midtown Manhattan. This is not the place to go for a joyride. I think there were 4 presidents, current and former presidents, in town when around that time or so. It might have been, might have been some sticky traffic.

Yeah. No, it was, you know, it was one of those days, but it was fine. So many people stopped, took pictures of this thing, you know. So it's two-tone color. It has an electrochromic roof so you can make— it's all glass, so you can make the roof clear or you can make the roof opaque. The thing about from a business perspective, this is a different form factor for an EV. True 7-seater, very comfortably seats 7, huge seats. It's a van. And it was a pretty cool car. So we'll see how it does. But that was a highlight. That's not in the hypercar range. It'll be more modestly priced, probably in the $40,000 to $50,000.

I wonder if that'll sell well. Do you think that that's— I mean, it's too weird maybe to sell well, right?

It's a little too weird to sell well. And we're used to success in the car business. The car people will say you need to sell 120,000 units to justify anything in a mass market vehicle. Tesla sells hundreds of thousands of Model 3s in the US a year. They sell about twice as many Model Ys as they sell Model 3s. So this is not like a 100,000 seller. It's probably more of a niche vehicle, tens of thousands of units a year. But when people see them, they'll think they're cool.

It's quirky. And my sense is that a typical family doesn't want to be quirky with their $40,000 vehicle. You know, maybe your socks— start with your socks, buy some quirky socks and show those off at work. But your vehicle, keep that more mainstream. That's, that's my sense.

It's a great point, actually. It's, you know, you see these things, maybe even like a Cybertruck, and you're like, oh, that's so cool. It'll be, you know, sell a gazillion units. And then you say to yourself, well, Maybe not everybody wants to drive around in a stainless steel tank or a VW bus.

What did you see in terms of the mix at the auto show? Do you feel like carmakers are going to have the right mix of vehicles for this moment, or are they over-electrified?

I think, you know, to answer the mix question in two ways, I don't think they have the right mix because one of the big problems in the US is there's too many expensive electric vehicles. And depending on how you count Teslas and all these sorts of things, which is officially a luxury brand, 25% of all the luxury cars sold in America are all electric. These are cars that are $50,000, $60,000. So that is problematic for the US market in terms of the mix of electric, hybrid, and traditional vehicles. You know, automaker by automaker, it's a little different. Ford has a complete lineup. General Motors is a little light on the hybrids. Toyota, way more focused on hybrids, not really focused on electrics. They do have a couple of models. For the country at large, you know, the mix is fine. For each individual automaker, it's a little bit more of a nuanced story.

This is going to, I'm gonna slip in what was going to be my next question here because you're starting to get to it. Which is Tesla. Tesla has sold off and I wanna know what's next. I wanna know how long this lull is gonna continue or is this a case where the stock will not come back to its former glory or what's gonna happen? And that is wrapped very much up in the electric vehicle cycle that you're talking about. So where are we and where are we headed?

You know, Tesla's an interesting one. If you look at it just like a car company, Tesla the carmaker, and they're pretty, and the older they get and the more cars they sell, the more like a carmaker they look. You know, its product lineup is old. The Model Y came out in 2020. The Model 3 came out in 2017. The Cybertruck is more of a niche vehicle. So their biggest sellers are very good cars and they're very good at making electric vehicles, but they're all older than all of this new competition. And, you know, Tesla has very high market share where they compete. They have very high market share of the, of the US luxury vehicle market. They have very, very high share, you know, 60%, 70% of the overall market for electric vehicles in the US. But they don't serve all the segments, right? They need more cars.

And you were talking about the hype cycle and what comes next for electric vehicles. My sense is that if you're an early adopter, if you're someone who was at the front of the line to buy a plug-in electric vehicle, you've already got yours, but the next person— now we're getting to the customers who are more price conscious and they want a good deal. They don't want to do this at any cost. And so you have to have the vehicles for them. And Tesla won't have that for a little while, right?

No. Tesla's lower-priced model is due to hit roads at the end of '25 or some point in 2025. And Tesla's actually— I mean, you can just plot it. They tend not to hit their target. So 2025, 2026. For a lower price model, you know, 1 to 2 years, a year and a half to 2 years away. I mean, that's a long time to wait. And oh, by the way, while that's happening, you know, depending Europe or China and even the US to a certain extent, you're going to have a lot more electric vehicles trying to fill up that space before Tesla gets there. I mean, Tesla—

China's BYD passed Tesla to become the largest electric vehicle maker recently, and they're making cheap cars, right?

Yeah. Tesla's average price for a car is still in the $45,000 range. BYD's is in the $25,000 range. We're rounding, but you know, so BYD became the largest basically by serving that lower-end segment and sales exploded. And so if you think back, like if you think about Tesla strategic mistakes, which I like to say sometimes because the emails flood in when I say Tesla has made a mistake, um, you know, they, they were first with the S and the X in this high-end luxury segment. They were first in this sort of lower-end luxury segment. They led. And then in the mass market segment, they're going to be a distant follower in terms of timing. Now, they're very good at making these cars and they have good charging infrastructure and all of that sort of stuff. But there's just no way to put it other than this lower-priced Tesla has been too late.

I was looking at some of the estimates for Tesla, and I think that they are expected by Wall Street to deliver just over 2 million vehicles this year. But if you go back a couple of years, the estimate was way higher. It was like 2.7 million. And if you look at the free cash flow estimate, that has collapsed from a peak of $17 billion. At one point, that's what they were expected to produce. This year in free cash flow. Now it's closer to $4 billion. You know, it's not a company that was always driven by the financial fundamentals, that stock, but the numbers have come down pretty harshly.

You know, it's interesting on that estimate point. I'll just throw this in quickly. You know, Tesla's down 30% this year. Its 2024 earnings estimates are down just about 25% this year. So, you know, to some extent, maybe earnings estimates are driving, you know, the market. The growth investors say this thing should trade at 60 times earnings. But as earnings estimates have fallen, the stock has fallen along with it.

Do you feel like the stock is a good deal here?

You know, we picked it at the beginning of '23. At the beginning of '24, we said you shouldn't buy it, but you could sell half of your position and basically keep your original position because the stock had doubled and just let it ride. So that was my view of the stock. It was a hold. I don't like holds because you either buy stocks or sell stocks. But we called Tesla a hold at the beginning of '24. There's too much going on to make me super bullish on Tesla. The beginning of '23, there was a ton of terrible things going on at Tesla. Elon was taking over Twitter, which was causing issues of management distraction, and they were cutting prices, and they still didn't have a low-price car, but it was $100. And it was to the point where it was like, I think this is as bad as it can get. And so we picked it.

Al, if I understand correctly, Tesla has cut prices on its existing vehicles, but it has also said that it's reaching the sort of natural limit of how far it can bring down costs to manufacture those vehicles. So maybe the cost cutting is done for now and we're waiting for that next cheap vehicle. Have I got that right?

Yeah, I think so. I mean, their operating profit margins fell, you know, 10 percentage points year over year in the fourth quarter. And they're below 10%, they're below Toyota. So you would expect them to say, well, we're getting to the limits of pricing. But it's always like another reason they say that is because, you know, you cut prices by $10,000 and oh look, you sell 100,000 more fly out the door. You cut prices by another $5,000 and, you know, nothing happens, right? It becomes— and I think that's— I think that is as important as what's happening in Tesla. And, you know, again, let's get the Elon emails flowing to Al. I think he almost learns on the fly. So when he cut prices by, you know, $7,000, $8,000 in one fell swoop, that was like, it created this stir in the auto industry. Why would you do that? Car companies tend to do things, you know, in a little more measured way. And Elon started saying things like, I can sell as many cars as I want. I just have to modify the price. Demand is infinite if my price is zero. You know, like he was making these, you know, like I just went to Economics 101 class. And I think he sort of learned that it's not actually exactly like he thinks. There's sort of a mix of pricing and incentives and even, dare I say, advertising that's better than just slashing prices every day.

Is it al.root@barons.com for those angry emails? Have I got that right?

Dow Jones. Tesla famously does no advertising.

I—

and these price cuts have cost it $25, $30 billion in sales revenue. You know, you could spend a lot on ads that is less than $25 or $30 billion.

I want to ask you the flip side of that Tesla stock question, which is Toyota stock. We had a listener of this podcast who was asking about Toyota, and that stock has charged higher on all of a sudden soaring hybrid demand. It seems like at the same moment that people decided we want to cool it a little bit on the electric vehicles, or we want to wait and see, they said we want hybrid vehicles, we're willing to pay extra for them. And Toyota makes better margins on its hybrid vehicles than its regular vehicles. So there's not this issue of, you know, eating huge costs up front. It's been doing this for decades. So What do you think? Is that something that can continue to power Toyota stock? I mean, I saw it at 11 times earnings even after this big run-up. Where do you think Toyota stock is headed? Or is that going to go back to being just a boring car stock?

Everything he said's right. Hybrids are doing, at this moment, hybrids are doing better than all electric vehicles. I think part of it is this affordability issue. A hybrid isn't a luxury car. You can go in and get a good deal on a hybrid. In, you get 50 miles a gallon, you say to yourself, hey, this is great and I'm doing something good for the environment. Thing number 2 is, listen, I do think it's a boring car company. All of these car companies in my world, you know, we had the pixie stick of Tesla growing. We hadn't had growth in my sector for 100 years. You know, we had single-digit P/E ratios and like, you know, we would write stories about like, oh, the new Explorer can boost sales by 5%. So it's still a boring car company. It's still Toyota. Now, I came armed with a statistic because, you know, I'm guilty of many, many things. I don't get everything right. I am very wary of Toyota up here. So, Toyota, you said 11 times earnings. In the last decade, it has never traded at 12 times earnings. To me, it feels like about as good as it gets. It's a wonderful company. It will— it changed the world of manufacturing. It is Toyota. They will continue to sell wonderful vehicles. I have one. I don't know if the stock works from here. I mean, it's had a great run. Do I wish I recommended it 6 months ago to people? I absolutely do.

So 11 times earnings might be a good deal for a regular stock, but it's a glamorous valuation for a legacy carmaker.

Oh my goodness. It's a glamorous valuation. And I get questions about like, why does, you know, GM and Ford, why do they never trade, you know, better than 5, 6 times earnings? They don't grow. If you look at sales at General Motors and Ford over a long period of time, you take out the, oh, this was a good year, this was a bad year. Their sales grow, you know, 1% a year on average. And it's a very competitive market. So car companies, you're never going to get in the good old-fashioned car companies. You're never going to get a market multiple because earnings don't grow at market rates.

Al, you can really help the American consumer here because you own both a Tesla and a hybrid vehicle, right? A Prius, is it a Toyota Prius? So in addition to talking Tesla versus Toyota stock, you've got them both in the garage. How do they— what do you like more? What's your— which one is your true love?

Oh, no doubt the Tesla. It's the nicest car I've ever owned., and I did the exact same thing as Jackson. They cut prices and then they gave me like $1,000 off, and then you get another discount for in Connecticut. So I got basically $11,000 off. The car cost me brand new about $31,000, so it's not outrageous. Maybe this story can make it in, maybe it won't. Like when I was at the stoplight with a Prius and the kids were in the back And, you know, there was like a Tesla beside me. I used to joke with the kids, okay, we're going to race this thing. And I would floor the Prius and it goes 0 to 60 conservatively in about a minute and a half. So the Tesla would be way down the road and, you know, you'd be like, we lost, girls. And they would laugh. The, you know, the Tesla is a much more fun vehicle to drive than my beloved Prius.

Al Root, you've done it again. You've, uh, you've brought us up to speed on what's going on in the automotive world. The New York Car Show, what's next for Tesla? How about Toyota stock, glamorously priced at 11 times earnings, you say? And, and hold off on the Tesla shares for now. Thanks as always. And since you're on loan to us this week from the TV show, I'm going to give it a second plug. It's called Barron's Roundtable. I should have said it airs on Fox Business, right? But you have to know the channel to go to. Fox Business, Fridays at 7:30 PM and Saturday and Sunday, 9:30 AM and 10:30 AM. I want to thank Tom for the question, and everyone, please keep your questions coming. You can tape on your phone, use the voice memo app, send it to jack.hough@barons.com. I also want to thank Al Root for the car chat and thank all of you for listening. Jackson Cantrell is our producer. If you need him, he'll be bogarting the helium near the hydrogen charging station. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, you can write us a review.

See you next week.

Hold on, you're just jumping in and saying it now?

Yeah, I just thought I'd— you got to take what you can get. It's about time I get more airtime on this show. Soon I'll take thanks for listening.

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