With the growing demand for personal and commercial vehicles, the rising tide of Electric Vehicles (EVs) globally, and the integration of advanced digital technologies, the automotive industry is poised to shift into high gear, paving the way for rapid expansion.

In this piece, I have evaluated two auto stocks, NIO Inc. (NIO) and Toyota Motor Corporation (TM), to determine which could generate better returns. 

In recent years, the automotive industry encountered numerous obstacles, including global economic variables such as increasing inflation, rising interest rates, and geopolitical uncertainty resulting from the Russia-Ukraine war. Microchip and labor shortages also significantly impacted the entire automotive supply chain.

Nevertheless, the auto industry is primed for significant expansion because of rising consumer demand for both personal and commercial vehicles, several incentives for transitioning to EVs, and the introduction of cutting-edge technologies like self-driving vehicles.

Moreover, the industry has already shown a lot of progress, with a 7.5% rise in new-vehicle sales in the United States during the first quarter.

Furthermore, EV sales witnessed a remarkable 48% surge, with over 258,000 units sold from January to March. They now account for 7.2% of U.S. new vehicle sales, compared to last year’s 5.8%. Manufacturers’ focus on enhancing battery performance and expanding charging infrastructure seems to drive the EV industry’s growth.

Looking ahead to the second quarter, S&P Global Mobility predicts a 16.5% year-over-year rise in U.S. new, light-vehicle sales volume, amounting to around 4.1 million units.

The industry is also embracing robotics to automate numerous supply chain processes. This growth of Artificial Intelligence (AI) and Virtual Intelligence (VI) tools, which improve quality, speed, and the capacity to satisfy customer needs, has ensured the competitiveness of the sector and its ability to generate more profit.

According to a report by Contrive Datum Insights, the global automotive market is expected to grow at a CAGR of 4.5% and reach $28.70 billion by 2030. The industry tailwinds could bode well for NIO and TM.

NIO has surged 32.7% over the past month, while TM has gained 9.9%. However, TM has gained 12.7% over the past three months, while NIO climbed 2.4%. Also, TM has gained 18.4% over the past nine months compared to  NIO’s 35.3% decline.

But which stock is a better buy now? Let’s find out.

Recent Financial Results

For the first quarter that ended March 31, 2023, NIO’s gross profit decreased 88.8% year-over-year to $23.63 million. Its loss from operations widened 133.6% from the year-ago value to $744.34 million. Moreover, net loss and adjusted net loss per ordinary share worsened by 165.9% and 217.7% year-over-year to $690.13 million and $0.36, respectively.

For the fiscal year that ended March 31, 2023, TM’s revenue from sales of products increased 18.2% year-over-year to ¥34.37 trillion ($237.87 billion), and its total sales revenues grew 18.4% year-over-year to ¥37.15 trillion ($257.26 billion).

Furthermore, as of March 31, 2023, the company’s cash and cash equivalents stood at ¥7.52 trillion ($52.03 billion), compared to ¥6.11 billion ($42.31 billion) as of March 31, 2022. Also, its current assets amounted to ¥26.46 trillion ($183.14 billion), compared to ¥23.72 billion ($164.19 billion) as of March 31, 2022.

Past And Expected Financial Performance

Over the past three years, NIO’s revenue grew at an 87.7% CAGR. Moreover, the company’s total assets increased at a CAGR of 79.9% during the same period.

Analysts expect NIO to report a loss per share of $1.24 for the fiscal year ending December 2023. The company is also estimated to report a loss per share of $0.61 in the fiscal year 2024. In addition, the company missed the consensus EPS estimates in all four trailing quarters, which is disappointing.

TM’s revenue increased at a CAGR of 7.6% over the past three years. Its EBITDA and net income grew at CAGRs of 4.6% and 6.4%, respectively. Also, the company’s EPS and total assets rose at 7.6% and 11.2% CAGRs over the same time frame, respectively.

TM’s EPS is expected to grow 557.3% year-over-year to $17.53 million for the fiscal year (ending March 2024). In addition, analysts expect TM’s EPS and revenue to increase 2.9% and 3.2% year-over-year to $18.04 and $283.43 billion in the fiscal year 2025, respectively. Also, the company topped its consensus revenue estimates in all four trailing quarters, which is impressive.

Valuation

In terms of trailing-12-month Price/Sales, TM is currently trading at 0.78x, 65.5% lower than NIO, which is trading at 2.26x. Likewise, TM’s trailing-12-month EV/Sales multiple of 1.36 is 40.2% lower than NIO’s 2.29. Additionally, TM’s trailing-12-month Price/Book ratio of 1.02x is 82.2% lower than NIO’s 5.79x.

Thus, TM is relatively more affordable.

Profitability

TM’s trailing-12-month revenue is 38.4 times what NIO generates. Moreover, TM is more profitable, with a trailing-12-month gross profit margin of 16.99% compared to NIO’s 7.80%. In addition, TM’s trailing-12-month EBITDA margin of 11.85% compared to NIO’s negative 30.74%.

Furthermore, TM’s trailing-12-month ROCE, ROTA, and ROTC of 8.84%, 2.28%, and 3.01% compared to the NIO’s negative 58.01%, negative 16.86%, and negative 20.77%, respectively. Moreover, TM’s trailing-12-month cash from operations of $22.26 billion compared with NIO’s negative $560.53 million.

POWR Ratings

NIO 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 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. NIO has an F grade for Stability, in sync with its 24-month beta of 1.29, while TM’s B grade for Stability is justified by its 24-month beta of 0.70.

In addition, NIO has a D grade for Sentiment, justified by its unfavorable analyst outlook. TM, on the contrary, has a B grade for Sentiment, in sync with optimistic analyst expectations.

Of the 56 stocks in the Auto & Vehicle Manufacturers industry, NIO is ranked #51, while TM is ranked #21.  

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Quality. Click here to view NIO ratings. Get all TM ratings here.

The Winner

The automotive sector is poised for significant development in the years ahead due to growing demand for vehicles, a swift transition to EVs worldwide, and the rapid integration of innovative technologies. Because of this, both NIO and TM have a chance to benefit from the industry’s positive trends.

However, considering NIO’s relatively weak financial performance, low profitability, and higher valuation, its competitor, TM, could be a better buy 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?

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TM shares were trading at $161.68 per share on Wednesday afternoon, up $1.21 (+0.75%). Year-to-date, TM has gained 20.29%, versus a 16.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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