Shares of Tesla (NASDAQ:TSLA) dropped after the electric vehicle giant reported third-quarter delivery numbers which slightly missed expectations and fell short of Elon Musk’s reported 100,000 delivery target for the quarter. TSLA stock is down about 5% on the news.
But, this selloff is just noise. Zooming out, Tesla’s third-quarter delivery report was actually very good from a big-picture perspective. Sure, the company delivered 97,000 vehicles, just shy of analyst estimates for 99,000 vehicles. But, hyper-focus on that slight miss completely misses the big ideas here. Those big ideas are that the Q3 delivery report confirms that Tesla does not have a demand problem, is continuing to grow deliveries and orders at a rapid rate and is absolutely dominating the global EV industry.
The big-picture takeaway is that Tesla continues to project as the most important player in what will soon be a very large global EV market.
The investment implication? Buy and hold TSLA stock for the long haul. In the long run, the EV market will grow by leaps and bounds. Tesla will maintain leadership position in the market. The company’s delivery volumes and revenues will run higher, margins will improve and wide losses will turn into big profits.
In the long run, all those positive developments will drive Tesla stock meaningfully higher. That’s why I say ignore the noise, see the forest through the trees and stick with TSLA.
Q3 Delivery Report Was Very Good
Do me a favor and ignore the fact that Tesla missed delivery estimates in Q3 by 2,000 cars. That doesn’t matter. Instead, in the big picture, what matters from the Q3 delivery report is all of the following:
- It was the company’s biggest delivery quarter ever, with total delivery volumes up 16% year-over-year and 2% quarter-over-quarter.
- Model 3 ramp-up remains robust, with deliveries up 43% year-over-year and 3% quarter-over-quarter.
- The big Model S and X slowdown is moderating, with delivery volumes for both roughly flat quarter-over-quarter.
- Last twelve month delivery volume for Tesla continues to climb, up 4% quarter-over-quarter and 88% year-over-year.
- Tesla is reporting all this growth against the backdrop of a sluggish global EV market.
- Consequently, Tesla’s global EV market share is up to 16% in 2019, from 12% in 2018 and 8% in 2017, according to InsideEVs data.
- Net orders posted a record in Q3, too.
- Most of those record orders are coming from new customers with no prior reservations, so new demand (not existing or old demand) is driving growth.
In other words, Tesla’s third quarter delivery report — although it missed analyst expectations — confirms that Tesla continues to grow despite sluggish broad EV trends. The company does not have a demand problem of any sort. And, it is expanding dominance in the EV market. Those are bullish — not bearish — takeaways.
Tesla Stock Has Big Long-Term Upside
In the long run, Tesla stock has big upside from today’s $231 price tag.
The logic is simple. Electrification is the future of the global auto market, as: 1) consumers increasingly warm up to the idea of saving the environment by driving an electric vehicle, 2) electric vehicles become cooler, with better designs and enhanced functionalities, 3) electric cars become cheaper as battery costs come down, 4) legislation continues to promote EV adoption and 5) EV infrastructure continues to expand.
By the end of next decade, it is reasonable to assume that around 25% of cars on the road are electric vehicles, versus 3% in 2018, according to International Organization of Motor Vehicle Manufacturers and InsideEVs.
The global passenger car market measures about 70 million cars, and should measure around 75 million cars by 2030, given historical growth trends. That means total EV delivery volumes in 2030 could measure about 18.8 million globally. Tesla currently controls about 16% of that market. By 2030, more competition will imply lower share, but Tesla’s share will still remain large given the company’s first mover, brand equity and battery tech advantages. Call it 10% share by 2030. That implies that Tesla will deliver about 1.9 million cars in 2030, at an average price of about $50,000, for total auto revenue of roughly $94 billion.
Auto gross margins should scale towards management’s target of 25% by then. The operating expense rate should fall below the auto industry average of 15% because Tesla doesn’t spend on advertising (a huge expense for traditional autos), and will probably settle around 10%. Thus, operating profits should measure around $14 billion, and that should reasonably flow into $50 in 2030 earnings per share.
Based on a market average 16-times forward earnings multiple, that implies a 10-year forward price target for TSLA stock of $800.
Bottom Line on TSLA Stock
Contrary to the market reaction and the headlines, Tesla’s Q3 delivery report was actually quite good. And it broadly confirms that this EV giant remains on a robust secular growth trajectory that will ultimately push TSLA stock substantially higher in the long run.
The investment implication, then, is simple. Ignore the noise. See the forest through the trees. Buy and hold TSLA stock for the long haul.
As of this writing, Luke Lango was long TSLA.
