In past years, I used to believe that Tesla (NASDAQ:TSLA) stock was definitely dramatically overvalued. This was in light of the tough competition it would face in the future. Also, Elon Musk was relatively inexperienced in the auto sector. Plus, consumers gave mixed reviews of the company’s vehicles. It also seemed likely that electric vehicles would not penetrate the market even 10 years into the future.
But over the last year, a lot has changed. I’ve realized that Tesla’s brand became so strong that it will almost definitely keep the majority of its EV market share. Meanwhile, the American automaker made big inroads in the huge Chinese EV market. Support is so strong that, within 10 or 15 years, the majority of vehicles sold will likely be EVs.
And perhaps most importantly, I’ve become aware of the viable notion that Tesla can make a great deal of money by charging extra fees for subscription services it can offer the buyers of its vehicles.
Still, I believe that, for Tesla stock to beat the overall technology sector in the next few years, the company has to execute very well.
How Tesla Can Become Extremely Profitable
If Musk’s company maintains most of its EV market share while the sector grows very rapidly, Tesla will, within several years, have an extremely large installed base of 50 million or more. Along the way, the company could, by selling software and services to the owners of its vehicles, become profitable enough to enable Tesla stock to outperform the technology sector as a whole.
As Morgan Stanley analyst Adam Jonas told Bloomberg last month:
“Tesla is … bringing into account the installed user base and the software and content services offered to those users. In the process, it takes you away from comparing Tesla to car companies and should rather be compared to software-as-a-service companies.”
A few years ago, I made a similar point about Blackberry (NYSE:BB), and I still believe that Blackberry will eventually benefit by selling a large amount of software and services through its QNX operating system for vehicles. It did not occur to me that Tesla could also make a great deal of money using this method until I recently read Jonas’ comments and similar ideas from others.
Additionally, Tesla, like other automakers, could generate high profits by renting self-driving cars to businesses and consumers.
Tesla Will Have to Execute Very Well
Nevertheless, I still believe that, for Tesla stock to reach, say, $850 in a year, $1,200 in three years, and $1,600 in five years, the company’s performance will have to be very impressive.
Specifically, it will have to maintain at least 65% EV market share in the U.S., Europe, and China. It must fend off strong challenges by many other well-established automakers with deep pockets.
To accomplish that goal, Tesla likely has to ensure:
- It’s manufacturing process meaningfully improves.
- Autonomous-driving offerings don’t fall significantly behind those of any of its competitors.
- Batteries are at least as cheap and have at least as much range as those of all of its competitors.
Further, Tesla’s brand will have to remain nearly as far ahead of its rivals as it is today. If one or more of Tesla’s EV competitors take a great deal of market share, TSLA will struggle to beat the sector.
The Bottom Line on Tesla Stock
I now see a path for Tesla stock to outperform going forward. But it will not be at all easy for the company to do so.
And, for more risk-tolerant investors, the shares of Electramechannica Vehicles (NASDAQ:SOLO) and Ayro (NASDAQ:AYRO) can turn into huge winners if they are able to grab just a few percentage points of the EV market.
As a result, I’m more upbeat about F stock, GM stock, SOLO stock and AYRO stock than Tesla stock. But I won’t be shocked if Elon Musk once again surprises his critics – including me.
On the date of publication, Larry Ramer held long positions in BlackBerry, Electramechannica Vehicles, and Ayro.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.