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Tesla (TSLA), Elon Musk's electric vehicle (EV) company, has been on quite a tear. In just the past month, the stock is up 44% and year-to-date (YTD) is up 111%. Currently, Tesla has a market-cap $825 billion, making it one of the most valuable companies in the world.
Understanding Tesla’s business model
Tesla is a pioneer in electric vehicles, with its Model 3 and Model Y selling worldwide. Initially, the other large automakers were slow to pick up the EV trend, which gave Tesla a first-mover advantage and capture market share. The company has built an entire infrastructure for EVs, from charging infrastructure to energy storage.
Tesla’s growth model hangs on three avenues:
- Introduce more vehicle models
- Scale production and reduce costs to make its EVs available and affordable as competitors enter the market
- Monetize its supercharging network and boost service revenue.
What is driving Tesla’s stock higher?
In addition to being one of the richest men in the world, Elon Musk, the CEO and co-founder of Tesla, is a visionary in the EV space. His foresight, determination, and hard work ethic are significant reasons that Tesla is so successful. In 2022, Elon became quite distracted when he purchased the social media company, Twitter. This acquisition closed in October and in May, Musk announced that he appointed a new CEO for Twitter. As a result, on May 15th, Wedbush reiterated an Outperform rating on TSLA, saying the new CEO at Twitter puts an end to some of the distraction risk and will be a positive for the EV company.
Another major reason we've seen such a significant rally for the EV stock are the recently signed agreements with auto giants General Motors (GM) and Ford (F), giving them access to its EV charging infrastructure. According to Piper Sandler's projections, Tesla has the potential to generate over $3 billion in charging revenue from non-Tesla owners alone by 2030, with the figure expected to reach $5.4 billion by 2032.
Musk believes a reason for the increase in TSLA is tied to the company's effort to perfect autonomous driving technology. He said, “Really the value of the company is primarily on the basis of autonomy. If you look at our total vehicle output, it’s almost 2 million vehicles this year or something like that. But that’s still only 2% of total vehicle production.” Musk also said, “The potential for autonomy is that the value of autonomy is so high, that even if you have a discount, a percentage probability of autonomy happening, that is so incredibly valuable.”
The rally has also been boosted by the the overall positive sentiment in the market. In the past month the S&P 500 is up 5% and YTD it's up almost 15%.
Tesla’s recent earnings
In its latest first-quarter earnings, Tesla’s earnings per share declined 23% to $0.73, missing analysts' estimate by 1.35%, as the company adopted a worldwide price cut strategy. The average selling price for Tesla’s vehicles fell to nearly $46,000 in the March 2023 quarter from $51,400 in the December 2022 quarter. Tesla’s gross margin (19.3%) fell below its targeted "floor" of 20%, but its revenue increased by 24% to $23.3 billion.
Tesla is currently focusing on higher volumes and looks to enhance profitability in the long term through autonomy, supercharging, connectivity and service. Analysts expect the June quarter EPS to fall further to $0.7 and fiscal 2023 EPS to fall 16% year-over-year to $3.03 amid a weak macro environment and slow production growth from any supply chain surprises.
Tesla's stock price rally amid declining earnings inflated its forward price-to-earnings ratio to 85.45, way above Ford’s and GM’s 8.14 and 5.5, respectively. Hence, Wedbush compares Tesla's share gains to Amazon (AMZN), which has a forward Price to Earnings Ratio (PE) of 81.01 and still keeps growing.
What lies ahead for Tesla?
During May's shareholder meeting, Musk hinted new Tesla products are in the pipeline without giving any details.
The much-awaited Cybertruck is expected to launch in the third quarter, making it Tesla's first new launch in three years. Tesla is also testing its 18-wheel, long-haul electric freight truck 'Semi,' and expects to ramp production next year with an aim to deliver 50,000 units during the year. Another product in line for 2024 production is the second-generation Tesla Roadster.
And like other tech stocks, even Tesla is harnessing the power of AI in full self-driving technology (FSD) that could create a whole new market. If it succeeds in working out the safety mechanics of FSD, it looks to monetize the technology by running robotaxis. Tesla is not alone. Alphabet (GOOGL), Ford, Amazon and many more have been working tirelessly to develop self-driving cars.
How high can will Tesla stock climb?
The Wall Street analysts are mixed about where TSLA is headed next. 9 analysts rate the stock Strong Buy, 2 a Moderate Buy, 11 have a Hold recommendation and 2 rates he stock a Strong Sell.
Last week, RBC Capital analyst Tom Narayan raised his price target on Tesla stock to $305, which is about 15% higher from TSLA is currently trading. He cited full self-driving (FSD) capabilities and its "robotaxis" plan. Wedbush analyst Daniel Ives is bullish on Tesla citing, "EV castle with its supercharger network, battery technology, and FSD software ecosystem that is unmatched globally compared to any other auto player."
Tesla stock could see some easing after it's recent rally. However, I remain bullish on the stock long term. Even though its valuation is high, the company is leading the electric vehicle revolution, while at the same time developing new technologies and partnering with existing automakers. I believe the future it bright for TSLA.
On the date of publication, Puja Tayal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
