Tesla (TSLA 1.50%) has been the darling of the auto industry over the past decade, building a market cap that at times was larger than all of its major competitors combined. But the company now faces more competition than ever before and rising interest rates haven't helped make Tesla's expensive vehicles more affordable for consumers. Investors have noticed, and Tesla stock is actually underperforming rival General Motors (GM -0.24%) by a wide margin over the past year.
If you're interested in investing in either Tesla or General Motors today, which stock is better? I think there's one clear answer when all factors are considered.
Valuation matters
Let's start with what investors are paying for each company. You can see below that Tesla's price-to-sales ratio is nearly 20 times higher than General Motors' ratio, and its price-to-earnings ratio is 7.5 times higher than GM's.
TSLA PS Ratio data by YCharts
These aren't perfect metrics for valuation, but they lay the ground for the kind of premium Tesla trades at to the industry broadly. However, there's also a reason for the company's higher valuation.
Tesla's big advantage
The biggest reason Tesla is more valuable than its competitors is its margins. The company makes more money on each vehicle sale than any major automaker, and that can be measured by higher gross margins and higher operating margins.
TSLA Gross Profit Margin data by YCharts
Not only is Tesla more profitable with each vehicle it sells, it is growing quickly, and plans to increase production by 50% annually. What we don't know is how sustainable either margins or growth will be long-term. There's more competition coming to the market, and last quarter Tesla produced 365,923 vehicles, a huge base from which to grow from.
High interest rates and recessions are bad for automakers
The auto industry has been extremely risky for investors but Tesla expanded at an ideal time. Interest rates were near zero and there hadn't been a (traditional) recession since 2009. That changed somewhat in 2022.
Interest rates are sharply higher, making it more expensive to finance a vehicle purchase, and many economists are calling for a recession in 2023 (some think its already here). That will likely dampen demand for all vehicles, including Teslas. I recently highlighted that the company is offering discounts to incentivize sales in 2022, which happened at the same time it cut production at its Shanghai plant by 20% for December 2022.
The data below shows the impact recessions have on auto sales. In 2009, sales fell by about 50% from the peak to the trough of the market, and you can see that Ford's revenue dropped nearly $60 billion during that time. This is also when GM went bankrupt (which is why its data isn't included in this chart).
US Auto Sales data by YCharts
GM would also feel the pinch if vehicle sales fall, but remember that Tesla's stock is still priced much higher than GM's. From an investment perspective, there's more room for error if you're GM than if you're Tesla right now.
Optionality and uncharted territory
Both of these companies have optionality to grow into new markets. And Tesla is in uncharted territory given it's only been a scaled automaker for a few years. Here are a few other factors to consider with these two stocks:
- Tesla CEO Elon Musk owns Twitter and has been spending more time and energy on the social media platform. This could both distract Musk from the automaker and bring unwanted attention.
- GM owns a majority stake in autonomous driving company Cruise, which is expanding its commercial operations. This has been a drain on cash, but it could be a growth engine long-term.
- Tesla says it's building a robot and an autonomous taxi fleet. Neither have been demonstrated in public, but these are potential avenues for growth.
- Tesla is expected to launch the Cybertruck soon and that could open a new market for the company.
Depending on how you look at each product or technology, GM or Tesla could have an advantage when it comes to their growth optionality. But these factors are worth considering in your investment thesis.
The winner is clear
When you add up valuation, operating metrics, optionality, and risk, I think GM is the better stock for investors. The business is solidly profitable today and is investing in further commercializing the autonomous driving fleet for Cruise, which could transform GM as a company. Tesla, meanwhile, has been discounting vehicles and slowing production, and its high-profile CEO is getting a lot of mixed attention for non-Tesla-related reasons.
GM is simply a better stock today -- and believe it or not, it has been for the past year, too.
