With A Similar Revenue Base Is Johnson & Johnson A Better Pick Despite The 30% Fall In Tesla Stock This Year?

We believe that the pharmaceuticals bellwether Johnson & Johnson (NYSE: JNJ) is currently a better pick over the auto giant Tesla (NASDAQ: TSLA). The decision to invest often comes down to finding the best stocks within the scope of certain characteristics that suit an investment style. In this case, although these companies are from different sectors, they share a similar revenue base of $85-95 billion. TSLA trades at a higher valuation of 6x trailing revenues, compared to 4.2x for J&J, and we think that this valuation gap will likely narrow over the coming years in favor of J&J, given its superior profitability. In the sections below, we discuss why we think JNJ will outperform TSLA in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. J&J Has Outperformed Tesla In The Last Three Years

JNJ stock has seen little change, moving slightly from levels of $155 in early January 2021 to around $150 now, while TSLA stock has seen a decline of 25% from levels of $235 to around $175 over the same period. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.

Overall, the performance of JNJ and TSLA with respect to the index has been quite volatile. Returns for JNJ were 9% in 2021, 3% in 2022, and -11% in 2023, while that for Tesla were 50% in 2021, -65% in 2022, and 102% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that JNJ underperformed the S&P in 2021 and 2023 and TSLA underperformed the S&P in 2022.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector including UNH and MRK, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could JNJ and TSLA underperform the S&P over the next 12 months — or will they see a strong jump? We think JNJ will fare better than TSLA in the next three years.

2. Tesla’s Revenue Growth Is Better

Tesla has seen its revenue rise 80% between 2021 and 2023, compared to an 8% increase for J&J.

Johnson & Johnson’s revenue growth was led by a 5% rise in its pharmaceuticals business and a 12% rise in the medical devices business over this period. J&J’s multiple myeloma treatment – Darzalex – and the autoimmune drug – Stelara – have been the key growth drivers for the company’s pharmaceuticals business in the recent past. Some of the company’s new drugs, including Carvykti – a multiple myeloma treatment, and Spravato – an antidepressant – have been gaining market share.

On the other hand, J&J also has some relatively older drugs that face generic competition and have seen their sales fall. For example, Remicade sales have declined by 48% between 2021 and 2023. Beyond pharmaceuticals, the company’s medical devices business has been doing well, primarily the Cardiovascular Care, which has benefited from the Abiomed acquisition (J&J acquired Abiomed in 2022). For J&J, pharmaceuticals sales growth will be weighed down in coming years due to the loss of the U.S. market exclusivity for Stelara in 2025. However, we think the growth in its Medical Devices business will likely offset the loss in sales from generic competition for Stelara.

Tesla’s revenue growth has been driven by nearly doubling of its consumer vehicles delivered. It delivered 1.81 million vehicles in 2023, compared to 0.94 million vehicles in 2021. However, the latest quarter hasn’t been rosy for the automotive giant. Tesla’s quarterly deliveries declined by 8.5% from a year ago to 0.39 million vehicles for Q1 2024, down 20.2% from the prior quarter. Some of the factors that have led to this slower growth lately are high-interest rates, making it more expensive for customers to fund vehicle purchases and increased competition from Chinese automakers, such as Nio, Xpeng, and BYD. Tesla has also been working on its semi-truck, but it has seen multiple delays in launch. The company plans to roll out deliveries by 2026, with annual production capacity expected to be 50K units. Tesla Semi Is On Track For A 2026 Launch offers more details on Tesla’s truck.

3. J&J Is More Profitable 

J&J’s operating margin has slid slightly from 26.6% in 2021 to 25.8% in 2023, while Tesla’s operating margin fell from 12.1% to 9.2% over this period. Tesla undertook aggressive price cuts last year amid higher inventory for some of its models, weighing on its overall margins. That said, Tesla’s margins remain the best in the EV industry.

Looking at financial risk, Tesla fares better than J&J, with its 2% debt as a percentage of equity being lower than 9% for J&J. Moreover, its 25% cash as a percentage of assets is higher than 15% for J&J, implying that Tesla has a better debt position and more cash cushion.

4. The Net of It All

We see that although J&J is more profitable, Tesla has seen superior revenue growth and has a better financial position. Now, looking at prospects, we believe JNJ is the better choice of the two, given its lower valuation. We estimate Johnson & Johnson’s Valuation to be $180 per share, reflecting over 20% upside from its current levels of $145. Our forecast is based on a 17x P/E multiple for JNJ and expected earnings of $10.70 on a per-share and adjusted basis for the full year 2024. The 17x P/E multiple aligns with the average value over the last five years.

On the other hand, we estimate Tesla’s Valuation to be $177, aligning with its current market price. Our forecast for Tesla is based on 73x forward expected adjusted earnings of $2.43 per share in 2024, aligning with the stock’s average P/E over the last five years.

Overall, we think J&J is better placed with an attractive valuation and robust demand for its medical devices business. Although Tesla’s truck rollout in 2026 will be a positive catalyst for its stock, the headwinds from increased competition and pressure on margins are likely to limit its upside in the near term.

While JNJ may outperform TSLA in the next three years, it is helpful to see how Johnson & Johnson’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/10/2024
[2] Cumulative total returns since the end of 2016

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