The electric vehicle industry is gearing up to be the next big thing, bordering on replacing internal combustion engine (ICEs) driven vehicles. However, the United States is lagging behind in the race, with China being the largest market and supplier of EVs across the globe, according to the International Energy Agency. With China leading the race in the production of cost-efficient lithium batteries, a key component used in EVs, the United States is under immense pressure to build its domestic EV industry.
Irrespective of the impending election results, the EV industry should witness significant growth. While Democratic candidate Joe Biden prioritizes the threat of climate change, and is supporting carbon free EV production, Donald Trump acknowledges the threat from China, and would be willing to support the domestic growth of the EV industry.
Tesla, Inc. (TSLA) and General Motors Company (GM) are leading the change domestically, by popularizing electric cars and trucks in the country. Tesla has already emerged as the leading producer of EVs across the world, while GM has the advantage of brand name and significant financial backing in the race for domestic market share.
Both companies have generated significant returns over the past six months. While TSLA gained 185.5% over this period, GM returned 65.3%. In terms of past month’s performance, GM is the clear winner with 13.4% gains versus TSLA’s negative returns.
But which stock is a better buy now? Let’s find out.
TSLA has become a red-hot stock after registering record profits for the fifth consecutive quarter (ending September 2020). The stock gained 3.3% in after-hours trading on October 21st following the release of its latest financial results. TSLA CEO Elon Musk collected the fourth tranche of his moonshot award, following the impressive results, making him the largest gainer at $11.8 billion in the Bloomberg Billionaires Index. Following the growing popularity of TSLA earlier this year, TSLA underwent a 5-for-1 stock split in August.
The company is currently planning to launch three new electric vehicles in the near future, including the Tesla Cybertruck and 2 electric cars. It is planning to expand into Indonesia to ensure a steady supply of nickel, a key component in manufacturing car batteries.
TSLA recently entered into the solar roof business, with Musk expecting it to become the next “killer product” in 2021. Total solar deployments in the third quarter that ended September 2020, more than doubled sequentially to 57 MV, while solar roof deployments tripled over this period.
TSLA is planning to invest up to $12 billion in electric vehicles and battery factories over the next two years, with manufacturing facilities in three continents. The company raised $4.97 billion through an at-the-market stock offering in September to fund its capital-intensive projects in the near future.
Moreover, TSLA is reportedly planning to launch its products in India in 2021. With a huge population and thereby market base, this expansion is expected to ramp up the profits for the company. Also, CleanSpark software and services company recently partnered with TSLA to use its batteries for a Microgrid project in South America.
GM’s miraculous recovery from almost being bankrupt to regaining its glory as one of the top three automobile manufacturers in the country has made it one of the most actively traded stocks. The company is currently in the process of manufacturing the GMC Hummer EV, which is expected to hit the market by 2022.
GM’s recent partnership with Nikola Corporation (NKLA) has allowed the company to partake in the development of a new class of hydrogen fuel-cell EVs. With an 11% stake in NKLA in exchange for $2 billion, GM expects to generate at least $4 billion in benefits through contract manufacturing of the Nikola Badger, as well as supplying batteries and fuel cells.
Earlier this year, GM signed a memorandum of understanding with Honda to establish a strategic alliance in North America to share common vehicle platforms as well as collaborate on technological advancements.
Recent Financial Results
TSLA reported impressive results for the third quarter that ended September 2020, surpassing analyst expectations. Its EV deliveries increased 7% year-over-year (subject to operating lease accounting) over this period. Revenue increased 39% year-over-year to $8.77 billion, while gross profit rose 73% from the same period last year to $2.06 billion. Its net income and EPS rose 131% and 69%, respectively. TSLA’s EPS for this period beat the consensus estimate by 33.3%.
GM delivered over 771,400 vehicles in China in the third quarter that ended September 2020, indicating a 12% rise year-over-year. Total industry SAAR is expected to increase 33.6% from the prior-year quarter to an approximately 15.9 million vehicles.
Expected Financial Performance
Analysts expect TSLA’s EPS to grow 112.2% in the current quarter (ending December 2020), 68.3% next year, and at a rate of 353.9% per annum over the next five years. The company has an impressive earnings surprise history, as it beat the consensus EPS estimates in each of the trailing four quarters. Analysts expect revenues to grow 35.7% in the current quarter and 44.7% next year.
GM’s EPS is expected to increase 2,320% in the next quarter (ending December 2020), 83.6% next year, and at a rate of 3.1% per annum over the next five years. Moreover, GM beat the consensus EPS estimates in each of the trailing four quarters. The company’s revenue is expected to increase 17.1% in the next quarter and 11.3% next year.
GM’s revenue is 4.11 times what TSLA generates. However, TSLA is more profitable with a gross margin of 21.1% versus GM’s 8.3%.
Also, TSLA’s ROE and ROA of 5.6% and 2.7% compare favorably with GM’s 3.6% and 0.8%, respectively.
In terms of non-GAAP forward PEG ratio, TSLA, which is currently trading at 161.86x, is 1,212.7% more expensive than GM, which is trading at 12.33x. TSLA is also more expensive in terms of trailing 12-month price/sales (12.65x versus 0.43x) and price to cash flow (84.58x versus 5.63x).
However, GM’s forward PEG ratio of 1.41x is 58.4% more expensive than TSLA’s 0.89x.
While GM is rated “Buy” in our proprietary POWR Ratings system, TSLA is rated “Neutral”. Here’s how the four components of overall POWR Ratings are graded for both these stocks:
TSLA has a “C” for Trade Grade, Buy & Hold Grade and Peer Grade, and “B” for Industry Rank. The stock is currently ranked #11 out of 29 stocks in the Auto & Vehicle Manufacturers industry.
GM has an “A” for Trade Grade and Peer Grade, and “B” for Buy & Hold Grade and Industry Rank. It is ranked # 4 in the same industry.
Though TSLA has established itself as the leader in the EV industry, GM has the potential to dethrone the company with its sheer market size, brand identity, and strategic partnerships. While TSLA is confined to the battery powered EVs to date, GM’s stake in NKLA allows the company to profit off the surfacing hydrogen fuel cell backed vehicles, which is expected to be more efficient than battery operated cars. Also, GM’s dual business model catering to the production of both traditional cars and EVs explains the higher revenues generated. Thus, GM’s surmounting earnings growth potential at a relatively lower valuation makes it a better buy right now.
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Why is the Stock Market Tanking Now?
TSLA shares were trading at $422.00 per share on Tuesday morning, up $21.49 (+5.37%). Year-to-date, TSLA has gained 404.39%, versus a 6.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…