Although the novel coronavirus pandemic still has the global economy on hold, financial markets have rebounded strongly over the past month on optimism that the spread of the virus is slowing and that economic normalization is on its way. And Tesla (NASDAQ:TSLA) stock has been a standout amid this market rebound.
That’s partly because investors have rushed back into the growth trade as the macroeconomic news flow has improved. And it’s partly because Tesla has announced tons of good news of its own over the past month.
That good news included strong Q1 delivery numbers, the launch of longer-range vehicles and a huge reported rebound in China sales, to name a few.
Net net, the S&P 500 is up about 30% over the past month. TSLA stock is up a jaw-dropping 115% over that same stretch.
The huge outperformance of TSLA stock will persist for the long haul. For five big reasons:
- The global electric vehicle (EV) market is set to boom in the 2020s.
- Tesla is the undisputed leader of the global EV market.
- Tesla has unparalleled advantages over every other peer in the space.
- Margins will continue to improve with technology breakthroughs and scale.
- Tesla stock is headed to $2,000 in the long haul.
Given these five reasons, I think it’s fair to say that Tesla stock is a long-term winner. Here’s a deeper look.
The Booming EV Market
One of the biggest megatrends today is the widespread adoption of electric vehicles.
This megatrend began to unfold in the 2010s. From 2014 to 2019, global EV unit deliveries rose more than 600% as consumer interest in and government support for EVs supported rising demand.
But this is just the beginning of the EV megatrend…
Today, EVs account for only 3.5% of total annual passenger car sales. That’s tiny. Over the next ten years, rising consumer interest, continued government support, falling EV costs, improving battery technology, more charging infrastructure and wider geographic reach will work in concert to drive that number towards 10%, 20% and higher.
My modeling suggests that EV penetration could reach about 30% by 2030, implying more than 20 million unit EV sales (up 770% from 2019’s delivery total).
The Undisputed Leader
The undisputed leader in the electric vehicle space today is Tesla — and contrary to popular belief, the company’s leadership position is only getting bigger.
According to company filings and InsideEVs’s market data, Tesla’s market share in the global EV market has almost doubled from 2017 to 2019, from 8.4% to 16.2%. This huge expansion can be attributed to Tesla’s launch of the lower-priced Model 3, which quickly became the world’s best-selling electric vehicle and supercharged the Tesla growth narrative.
Next up, Tesla will deliver another affordable EV, the Model Y, around the same time that the company pushes hard into the huge China auto market (China accounts for about one-third of all passenger cars sold globally). Those two catalysts should help Tesla, for the foreseeable future, not just maintain huge market share, but potentially even grow their share in 2020/21.
Huge Advantages
Looking out longer term, I have a high degree of confidence that Tesla will remain the EV market leader given the company’s huge technological, production, and brand advantages.
On the technology side, Tesla is miles ahead of other automakers when it comes to EV battery technology. As such, the company’s electric vehicles are simply better. They last longer. They drive farther. And they’re safer. So long as these things remain true — and most analysts believe that they will for at least the next few years — Tesla will simply have the best products in the market.
On the production side, Tesla is also miles ahead of other automakers when it comes to mass producing EVs. Most other automakers are just starting to mass-produce EVs. Tesla has multiple gigafactories which have unparalleled capability when it comes to making thousands of EVs. Accordingly, for the foreseeable future, Tesla should be one of the only companies with robust supply in the market.
Meanwhile, on the branding side, Tesla is the only “cool” brand in the auto-market. Thanks to the company’s goal to change the world, it’s eclectic founder Elon Musk, the soaring TSLA stock price, and the aura of exclusivity surrounding the cars, Tesla is both the most talked-about and most in-demand auto brand in the world.
Improving Margin Profile
One of the keys to Tesla unlocking long-term value is the progression of its gross margins. Bears think gross margins will go down. Bulls think they will go up.
The bulls are right, for two big reasons.
First, there’s Wright’s Law. As the smart folks over at Ark Invest have pointed out, Wright’s Law states that for every cumulative doubling in the number of products produced, manufacturers realize a consistent cost decline in percentage terms. In other words, increased scale leads to lower production costs. This is especially true for Tesla, since sustained technology breakthroughs will continue to lead to lower EV battery costs.
Second, there’s the rising demand. While Tesla’s unit production costs will come down over the next few years, unit sales prices won’t come down by as much. That’s because there’s so much organic demand for EVs, and specifically for Tesla cars, that the company only needs to introduce slight price reductions in order to sustain huge demand.
Largely similar unit prices on top of lower unit costs leads to bigger unit profit margins.
A $2,000 Stock One Day
My modeling suggests that TSLA stock is on its way to becoming a $2,000 stock over the next decade.
This model assumes:
- The global EV market will boom to over 20 million annual deliveries by 2030.
- Tesla will maintain ~15% market share in that market, leading to over 3 million annual deliveries.
- Average auto sales prices drop to roughly $40,000, and total revenues (including the solar business) rise to over $150 billion.
- Auto gross margins rise towards 25%, and the opex rate drops to around 7%.
- Earnings per share wind up around $120 by 2030.
Based on a 16-times forward earnings multiple — the average medium-term forward multiple in the stock market — $120 in 2030 earnings per share implies a fair 2029 price target for TSLA stock of nearly $2,000.
Bottom Line on TSLA Stock
Tesla stock is a long-term winner. Even at $700, it is not overvalued. That combination means that TSLA stock is an attractive buy here and now for long-term investors.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long TSLA.
