This Underappreciated Stock Could Be Entering Its Next Growth Phase

All the focus in the auto industry lately seems to be focused on electric vehicles (EVs). But my favorite automotive stock only makes a single EV for its largest market and is spending its research and development (R&D) money on new twin-turbo V8-powered sports cars.

It's Toyota Motor (NYSE: TM), and while it admittedly spent the 2010s as a producer of boring, reliable commuter cars, in the 2020s it has become one of the most dynamic and exciting names in the auto industry. Despite that, it's overlooked as investors seek out companies focusing on EV development.

Why am I bullish on Toyota? Well, I will admit that part of the reason is that my attainable dream car is an MK V Supra. But there are other reasons, too. Read on, and I'll tell you.

Image source: Getty Images.

Let's go places

Toyota really needs no introduction; there's a decent chance you've interacted with a Toyota vehicle today. The company's flagship model, the humble Corolla, is the single most produced car in history, with more than 50 million units sold since its introduction in 1966. It also makes staples of American and global roads like the Camry, Rav4, Tundra, Tacoma/Hilux, and Prius.

And while some companies are cutting models and streamlining their lineups while investing heavily in electric vehicles, Toyota only sells a single pure EV in the American market, the bZ.

But the company seems to be spending its R&D dollars on projects designed to give its brand the bedroom-poster appeal. Case in point: the new GR GT, which is a supercar with a 4-liter twin-turbo V8 under the hood, a transaxle gearbox, and over 600 horsepower.

Toyota is having fun, being exciting, and letting its engineers go a little crazy in a very good way. It's attracting attention to its brand, and it's a strategy that seems to be working because Toyota is one of the most profitable auto companies in the world despite the general affordability of its models.

Toyota's profitability stands out

Despite slowing vehicle sales in Toyota's largest market, the United States, sales for Q2 of Toyota's fiscal 2026 grew slightly by almost 3%, and sales in North America grew by almost 15%. Revenue grew by 8.1% over the second quarter of Toyota's fiscal 2026, totaling 12.38 trillion yen ($80.5 billion). Net income really surged, growing 62% from 573.7 billion yen to 932 billion yen ($5.9 billion).

And that brings me to Toyota's profitability. The company has a gross profit margin of 17.9% and a net income margin of 9.4%, which is higher than any other automaker aside from Ferrari, which doesn't really compete with Toyota in any meaningful way. Compared to its peers, Toyota's profitability really stands out. Volkswagen, for instance, is the only automaker that can rival Toyota in terms of size. Toyota wins easily compared to VW's 15% gross margin and 2.3% net margin.

Even better, it looks like Toyota stock is undervalued at the moment. The company's forward price-to-earnings ratio (P/E ratio) is sitting at 14.1 compared to the median in the sector at 19.8. Toyota is a steady grower with a safe business that isn't going anywhere anytime soon. The stock is up 31% over the past 12 months compared to the S&P 500's 16.9% return, and it has plenty of room left to grow based on its valuation.

Now seems to be a good time to get behind the wheel. All of Toyota's competitors are operating on razor-thin margins while Toyota makes a healthy profit on every car it sells. Its revenue is growing quickly, its brand is gaining all the right attention, it's undervalued, and, well, Toyota stock looks like it's going places.

James Hires has positions in Toyota Motor. The Motley Fool recommends Ferrari, Stellantis, and Volkswagen Ag. The Motley Fool has a disclosure policy.