It has been several years now since Elon Musk said it was time to move on from hybrids, with the Tesla (TSLA) CEO dismissing hybrid vehicles as merely a “phase.” Meanwhile, rival Toyota Motor (TM) doubled down - and today, hybrids are more popular than ever, while demand for pure electric vehicles (EVs) cools.
As Toyota execs laugh all the way to the bank, the stock is a buy. Here's what investors need to know.
Hybrids vs. EVs
The Japanese carmaker doggedly poured billions into hybrid vehicles that combine battery power with traditional internal combustion engine (ICE) vehicles. This drew criticism from both investors and environmentalists alike.
Consumers would balk at buying more expensive fully electric cars, Toyota repeatedly warned. Now, a combination of stubbornly high prices and concern over inadequate charging infrastructure has effectively chilled enthusiasm for EVs in markets from Europe to the U.S.
I’m sure Toyota executives have a smug look on their faces as they say, “We told you so.”
And as they do, they’re probably pointing to a stock chart showing that none other than TSLA is down about 20% year-to-date, while Toyota stock is up over 29% year-to-date. Over the past year, Tesla is up only about 2%, while Toyota stock has soared nearly 70%.
There are several types of hybrids. Plug-in hybrids, or PHEVs, can run for dozens of miles on electric power alone and be charged at home, though their large battery means they are generally expensive. Full hybrids combine a smaller battery and a traditional engine that run together, making them cheaper both to buy and maintain.
Here in the U.S., our hybrid market is dominated by Toyota, Honda (HMC), and the South Korean duo of Kia and Hyundai.
What about our domestic manufacturers? Last month, General Motors (GM) - which had previously pretty much dumped plug-in hybrids from its product range - said it would reintroduce the technology.
Ford Motor (F) did stick with hybrids, considering them as an interim technology. It forecast that sales of such models will surge 40% this year, double last year’s pace. It sold more than 52,000 Maverick pick-up trucks in 2023, making it the fifth best-selling hybrid in the U.S. - trailing only behind hybrid models from Toyota and Honda.
Hybrids Are a Moneymaker for Toyota
Fully hybrid vehicles are highly profitable, often with double-digit profit margins that surpass those for traditional ICE or plug-in hybrid cars - and certainly surpassing fully electric vehicles, which are often lossmaking.
The shift in the automotive market globally toward hybrids has already strengthened Toyota’s bottom line. Sales of hybrids at the world’s largest carmaker climbed by almost 1 million to 3.4 million vehicles last year. This helped the company raise its forecast for operating profit to a record $33 billion for the year to March.
In Toyota’s latest quarter, hybrid sales increased 47% year on year to 951,000 (32% of global retail sales), as total vehicle sales rose 10%.
Last month, Toyota chairman Akio Toyoda predicted that demand for all-electric vehicles would hit a ceiling at 30% of the global market, creating an opportunity for more hybrid sales.
The company has also said it will be selling 5 million hybrids annually by about 2025. It has targeted just 3.5 million EV sales annually from 2030.
Toyota's Solid-State Battery Strategy
Toyota is also going down a different path when it comes to batteries for EVs. While Musk is the champion of lithium-ion batteries, Toyota is working on solid-state battery technology.
The company says it is close to being able to manufacture next-generation solid-state batteries at the same rate as existing batteries for EVs. If so, it will mark a milestone in the global race to commercialize the technology.
Solid-state batteries replace a liquid electrolyte with a solid one, and use lithium metal at the anode instead of graphite, the current standard in lithium-ion batteries.
Last year, Toyota announced a partnership with energy group Idemitsu Kosan to jointly develop and produce a solid-state battery material called sulphide solid electrolyte, which the companies said was most promising in addressing the durability issue.
This type of battery has long been heralded by auto industry experts as a potential “game changer” that would address EV battery concerns such as charging time, capacity, and the risk of catching fire.
Toyota expects its electric cars powered by solid-state batteries to have a range of about 750 miles — more than twice the range of its current EVs — and have a charging time of 10 minutes or less. For comparison, the Tesla Supercharger network (the largest of its kind) offers the equivalent of a 200-mile range from a charge of 15 minutes.
If Toyota is indeed successful in the manufacturing process, it would allow the company to mass produce solid-state batteries by 2027 or 2028.
TM Stock Is a Buy
Despite the company following a different path than other automakers, I fully expect Toyota to retain its crown as the world’s biggest automaker for at least several more years. In 2023, the company sold 11.2 million passenger vehicles worldwide.
And I’m positive on the progress of the TNGA (Toyota New Global Architecture) program. TNGA develops vehicles using common parts, and lowers initial assembly plant investments by about 40%, according to the company.
Add it all up and Toyota stock is a buy during any broad market weakness, under $250.
