Shares of electric-vehicle giant Tesla (NASDAQ:TSLA) have been on a roller coaster ride over the past several years. Since 2012, Tesla stock has fluctuated by an average of 70% each year. By comparison the average annual percentage change of the S&P 500 over that same time period was about 13%.
In other words, since 2012, TSLA stock has been more than five-times as volatile as the stock market.
That shouldn’t come as a surprise to the owners of TSLA stock. Such enormous volatility comes with the territory of being the early leader of a nascent electric-vehicle (EV) market with tremendous long term potential and equally tremendous uncertainty. Good news sparks hope and belief in Tesla’s long- term growth potential. Bad news reminds investors that its long term success is anything but guaranteed, and that a lot could change between now and when the EV market reaches maturity.
The EV market is still very young, and TSLA is still growing very quickly. As a result, the company still has a lot of growth left and a lot of growing pains left, too. That means the roller coaster ride of TSLA stock is far from over.
Ultimately, though, TSLA stock will climb in the long-run. Here’s why.
Its Growth Isn’t Slowing
The long term fundamentals of TSLA remain favorable and imply that this company will one day be a very important player in the soon-to-be huge global EV market, with respectable margins and sizable profits. Those fundamentals create a runway for TSLA stock to rise towards $700 in the long-run.
There has been a lot of noise about Tesla’s “slowing growth trajectory”. But, its growth really isn’t slowing.
Global EV sales growth is slowing somewhat because of reduced tax incentives. But this is just a rough transition period from a market driven by tax incentives to a market driven by consumer demand. This transition period will pass, and when it does, the growth of the EV market will re-accelerate because demand for EVs is rising.
With respect to Tesla specifically, the EV giant has actually grown its market share during this slowdown. Tesla’s share of the U.S. EV market has risen from 50% in late 2018 to over 60% today. Its global EV market share has gone from 12% in 2018 to over 14% in the first half of 2019. Thus, TSLA is still dominating the EV sector, and the EV market – although it’s going through a rough patch today – remains poised to grow over the long-term.
Tesla’s Margins Are Fine
There’s also been a lot of noise surrounding Tesla’s “lack of profits”.
Specifically, some are concerned that its gross margins haven’t moved as high as TSLA said they would. Investors are also worried that, after generating profits in late 2018, Tesla has gone back to losing money in the first half of 2019.
But such concerns are overblown. TSLA has an automotive gross margin of about 20%. That’s fairly standard for auto companies.Over the long-term, TSLA’s operating-spending rate should drop to 10%, which is also standard for auto companies, . as long as its revenues keeps rising towards auto-industry averages.
Indeed, Tesla could eventually reach a lower-than-average operating-spending rate because the company doesn’t spend a dime on advertising, while other auto companies spend an arm and a leg on ads. Tesla’s gross margin could eventually reach 25% as battery costs keep coming down.
If TSLA’s gross margin reaches 25% and its revenue continues to grow, its operating margins can reach 15%.Assuming TSLA can generate tens of billions of dollars in revenue, an operating margin of 15% should translate into billions of dollars in profits.
TSLA Stock Can Reach $700 in the Long-Term
Over 70 million cars were sold globally in 2018. The volume of car sales is growing at a fairly steady 1%-3% rate per year. Extrapolating that out, the global auto market will likely hit 80 million unit sales by 2030.
EV unit sales have climbed from a 0.5% share of total vehicle sales in 2014 to over a 3% share in 2018. At current growth rates, 2019 EV unit sales will be about 4% of total vehicle sales. Over time, consumption and legislation changes will continue to drive EV adoption up. By 2030, the EV penetration rate could be about 25%, or about 20 million EVs in a total global vehicle market of 80 million.
Tesla delivered just shy of 250,000 cars in 2018, equaling 12% of the global EV market. Over time, that market share will likely fall due to increasing competition, but the declines will be somewhat offset by Tesla’s introduction of new vehicles.
By 2030, Tesla could realistically achieve market share of 7.5. In a 20 million global EV market, that means TSLA would sell about 1.5 million EVs. Assuming a $50,000 average price tag, that implies automotive revenue for TSLA of $75 billion by 2030.
Assuming a 15% operating margin, TSLA would generate $11.25 billion of operating profits. After factoring in interest expense, taxes, and share count (which will be higher than today’s 175 million base), that could reasonably result in earnings per share of $42 by 2030. Based on a forward price-earnings multiple of 16, which is average for the market, $42 in EPS translates into a 2029 price target for TSLA stock of $670.
The Bottom Line on TSLA Stock
Tesla stock has been exceptionally volatile over the past several years. It looks poised to remain volatile over the next several years,. But all this volatility is ultimately leading to a world in which EVs will account for a big chunk of the global car market, Tesla will be a large. important player in that huge global EV market, and TSLA stock price will be substantially higher than it is today.
So if you can stomach the near-term volatility of TSLA, Tesla stock remains a solid long-term investment.
As of this writing, Luke Lango was long TSLA.