Tesla (NASDAQ:TSLA) stock has been on a roller coaster ride over the past few days. First, TSLA stock popped big after reporting first quarter numbers that crushed expectations. Then, the stock gave back all of those gains amid some weak macroeconomic data.
After all that, in one of the weirder catalysts I’ve ever seen, the stock plunged more than 10% after CEO Elon Musk tweeted that the Tesla stock price was “too high.”
Tesla stock price is too high imo
— Elon Musk (@elonmusk) May 1, 2020
If you’re new to Tesla stock, this may all seem rather shocking, weird and unprecedented. If you’ve been following the stock for a while, though, you know that it’s not.
TSLA Stock Fundamentals Remain Strong
All of this noise — the huge rallies, the huge drops, Elon’s antics, so on and so forth — is commonplace for Tesla. I’ve been saying since late 2018, when this was a $250 stock, that investors need to ignore the noise, and see the forest through the trees.
The same is true this time around. Ignore the post-earnings volatility. Ignore Musk’s tweets. Just pay attention to the fundamentals. Those fundamentals, which can be broken down into five critical points, imply that all this noise is doing, is creating a buying opportunity in Tesla.
- Model 3/Y delivery volumes continue soar, proving that Tesla’s lower price-point EVs are ushering in a new era of mega-growth among non-high-income households.
- Model S/X delivery volumes are stabilizing, implying that the luxury EV market is not saturated and still has more room for growth.
- Gross and operating margins continue to meaningfully improve, laying the groundwork for big profit production at scale.
- Tesla’s technology, branding, and production advantages are only widening, ensuring that this company will remain the global EV leader for several more years (at least).
- Below $700, TSLA is attractively valued relative to the company’s long-term growth potential.
Model 3/Y Delivery Volumes Remain Strong
Tesla sustained strong demand for its low-priced Model 3 and Model Y vehicles in the first quarter, proving that Tesla’s ability to mass manufacture and sell cheaper yet still technologically advanced EVs is helping spark mainstream adoption in the category.
Specifically, Model 3/Y deliveries soared 50% year-over-year, largely consistent with prior quarter growth rates. Concurrently, trailing twelve month (TTM) Model 3/Y delivery volume rose by more than 8%, also consistent with the ramp we’ve seen in previous quarters.
Yes, those delivery trends will get whacked in the second quarter amid production plant closures. But, considering how much momentum the Model 3 and Y have today, it’s very likely that once Tesla’s operations are back up-and-running, Tesla will continue on a breakneck growth trajectory with these two vehicles.
Long-term, early Model 3/Y success is a sign that Tesla’s bigger picture strategy of leveraging economies of scale and technological improvements to drive EV prices lower and spark mainstream consumer interest, is working. So long as this strategy keeps working, Tesla is well-positioned to sell a lot of cars over the next decade.
Model S/X Delivery Volumes Stabilizing
Concurrent to red-hot Model 3/Y delivery trends, Model S/X delivery trends in the first quarter meaningfully improved and stabilized for the first time since mid-2018. That is, Model S/X delivery trends have been weak for the past two years as robust, lower-priced Model 3 sales have somewhat cannibalized Model S/X sales. Model S/X has consequently undergone six straight quarters of delivery declines.
But, in the first quarter of 2020, Model S/X deliveries rose 1% year-over-year. On a TTM basis, Model S/X deliveries were flat quarter-over-quarter. That hasn’t happened since mid-2018. Zooming out, the bigger idea here is that Tesla’s luxury vehicles won’t fall by the wayside. The luxury EV market still exists. It’s still strong. And Tesla still dominates it.
Profit Margins Improving
Perhaps most importantly, Tesla’s profit margins are surging higher. In the first quarter, automotive gross margins rose 300 basis points sequentially and 540 basis points year-over-year to a multi-quarter high of 25.5%. Total gross margins also rose to a multi-quarter high of 20.6%. Total gross margins were up 180 basis points sequentially, and more than 800 basis points year-over-year.
Economies of scale also produced significant positive operating leverage. Consequently, 800 basis points of gross margin expansion, turned into 1,600 basis points of operating margin expansion. Operating margins came in at 4.7%.
The company yet again reported a net profit. This marks the third quarter in a row in which Tesla has been positive. That’s important. Tesla has been profitable before. But only in one-off situations. This is the first time in company history that Tesla has been consistently and regularly profitable.
In other words, economies of scale is kicking in. Tesla going forward will only get more profitable, with better margins, and bigger profits.
Tesla has three big advantages: technology, branding, and production capacity. In the first quarter, the company extended its lead across all three verticals.
On the technology front, the company significantly expanded the driving range of its vehicles. For example, the Model S now has a 400-mile driving range. The median driving range across all other EVs is somewhere around 125 miles. So, Tesla is simply making better cars.
On the branding front, Tesla remains the coolest brand in the auto sector. The company exited the quarter with its highest-ever backlog.
On the production front, Tesla continues to expand production capacity all across the globe, and is staring at a near-future where they will be the only pure EV maker with 1 million vehicle production capacity.
So long as Tesla sustains these three critical advantages, the company will similarly sustain its unparalleled leadership position in the global EV market.
Huge Potential for Tesla
Long-term, Tesla stock has huge upside potential.
My modeling assumes the following:
- 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. Based on a 10% discount rate, equates to a 2020 price target of over $800, implying that shares look attractively valued below $700.
Bottom Line on TSLA Stock
Huge rallies. Gut-wrenching selloffs. Odd tweets. It’s all part of the norm for Tesla stock. Long-term investors would be wise to ignore all that noise, and see the forest through the trees.
When they do that, it becomes increasingly clear that Tesla is a long-term winning trajectory, and that the recent plunge has created a buying opportunity in Tesla.
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.