Last month, electric vehicle maker Tesla (NASDAQ:TSLA) reported very strong third-quarter numbers that included a surprise profit. Ever since that print, a lot has happened.
TSLA stock has popped more than 35% to its highest levels since January 2019. Wall Street analysts have broadly hiked their price targets by a considerable amount. But many have maintained “sell” ratings on the stock.
One notable hedge fund that was short TSLA — Brazil’s Adam Capital — threw in the towel on shorting on TSLA. Another — David Einhorn’s Greenlight Capital — has doubled down on their short thesis, which has sparked a public feud on Twitter (NYSE:TWTR) between Einhorn and Tesla CEO Elon Musk.
In other words, it’s been a very noisy past few weeks for the EV maker. But, as I’ve always said with TSLA stock, the best thing investors can do is take a step back, drown out the noise, pay attention to the fundamentals, and see the forest through the trees.
When they do that, it becomes clear that TSLA stock is a long-term winner for three very obvious reasons. Those three reasons are as follows.
Demand Will Keep Surging
Central to the long-term bull thesis on TSLA stock is that Tesla has been selling, still is selling, and will continue to sell more and more of its signature electric vehicles.
The idea here is pretty simple. There are ground-level trends proliferating throughout the global consumer landscape wherein consumers are becoming more ecologically and socially aware than ever before. A big part of this is carbon emission reduction. Consumers, especially young ones, want to “save the world,” and perhaps the most tangible and meaningful way they can do this is by driving an electric car, as opposed to a gas-powered one.
Consequently, adoption of electric vehicles has soared over the past few years. More than this, Tesla has been the face of the growing EV industry. That’s because Tesla was first to market, has more car options than competitors, is creating cars with better specs and tech, has worked tirelessly to have more rampant production with lower input costs, and possesses second-to-none brand equity. All of these factors are driving Tesla to not just grow with the EV market, but actually grow share in the growing EV market.
This dynamic will persist. Tesla is still launching new models — the crossover Model Y comes next, then probably an electric pick-up truck — and each new model thrusts Tesla into a new demand vertical in the auto market. This addressable market expansion, coupled with continued better-than-peer innovation and sustained strong brand equity among young consumers (who represent the next generation of car buyers), will lead to Tesla’s annual delivery volumes continuing to rise at a rapid rate.
Thus, from a revenue perspective, Tesla projects as a big grower for a lot longer.
Profitability Will Keep Improving
Also central to the bull thesis on TSLA stock is that Tesla’s profitability profile is improving and will continue to improve thanks to favorable demand drivers and enhanced scale.
Tesla is often knocked for piling up huge losses over the past decade. The company was spending big to grow, in an industry with naturally low gross margins, so the result was huge losses.
But, this era of huge losses is coming to a close. Tesla’s gross margins are improving thanks to favorable demand drivers and lower input costs, such as lower battery costs. At the same time, the company is leveraging increased scale to drive positive operating leverage, especially in the absence of significant marketing spend (Tesla doesn’t advertise like traditional auto giants). As of last quarter, Tesla’s gross margins were running around 20%, while the opex rate was running around 15%.
If that combination persists, then Tesla projects to remain profitable.
Better than that, though, this combination should improve. Gross margins should continue to move higher thanks to favorable demand drivers and lower input costs. Opex rates should keep falling so long as demand keeps surging. Net net, when all is said and done, this could easily be a 25% gross margin company with 10% opex rates, meaning that not only is Tesla done running up huge losses each quarter, but it’s also on a path towards generating huge profits one day.
Valuation Leaves Room for Upside on Tesla Stock
The last — and arguably most important — part of the long-term bull thesis on TSLA stock is that the current valuation leaves room for substantial upside in shares over the long run.
You can see the numbers in-depth here, but the quick recap is as follows.
Each year, about 70 million passenger cars are sold globally. That number is growing slowly thanks to urbanization and population growth and should hit about 75 million cars by 2030. At present, only 3% of those cars are EVs. That number is rising rapidly, and at its current pace, will likely hit somewhere around 25% by 2030. That implies just under 20 million EV deliveries in 2030.
Tesla presently controls 16% of the global EV market. Market share will drop over time with new competition. But it will remain reasonable given Tesla’s strong competitive positioning. It will likely settle around 10% long term, implying nearly two million Tesla deliveries in 2030. Assuming an average selling price of $50,000, gross margins of about 25%, and an opex rate of 10%, my modeling suggests that Tesla is on track to hit $50 in earnings per share by 2030.
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
There’s been a lot of noise — both good and bad — surrounding Tesla stock over the past few weeks. Investors would be wise to ignore all that noise, take a step back, and see the forest through the trees.
In that forest, three things are obvious. Demand drivers are strong, so revenues will keep going higher. Profitability keeps improving, so profits will keep going higher. And, TSLA stock isn’t as expensive as the bears make it out to be, so shares should move higher in the long run with revenues and profits.
The big picture implication? Stick with TSLA stock for the long haul and buy more on dips to/below $300.
As of this writing, Luke Lango was long TSLA.
